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Time Value of money-applications

1 Capital recovery or Instalment


Loan amount
Interest
Term
Instalment

100000
0.09
5
=PMT(Interest,Term,-PV)

25,709.25

2 Amortisation schedule
Inst.no
0
1
2
3
4
5
3a

3b

Principal

Interest
100000
16,709.25
18,213.08
19,852.25
21,638.96
23,586.46

0.09
9,000.00
7,496.17
5,856.99
4,070.29
2,122.78

An initial loan of Rs. 100000 is given to a customer with the explicit option for
the customer to repay principal anytime any amount. Develop a model to incorporate
this payment adjusting the remaining EMI without changing the time period
Loan amount
Tenue
Interest
EMI
In the same problem, if the emi is to be retained and the period is to be adjusted,
how will you change the model?
Loan amount
Tenure
Interest
EMI

Internal rate of return


Time
0
1

2
3
4
5

100000
5
0.14

$29,128.35

100000
5
0.14
$29,128.35

cash flows
-140000
40000
40000
40000
40000
60000
=irr(cash flow range)

Structuring of loan repayments


Cost of the asset
Required IRR
Term

100000
0.2
5

years

Pattern of payments
1
1
1
1
1

0
0
1
1
1

0
1
0
1
0

Term
0
1
2
3
4
5

Pv of Rs.1

Pattern

Total of PV of pattern
Amount to be recovered

Accelerated recovery
A company wants a loan of 1000000, to be recovered in 5 instalments with every instalment
increasing at a rate of 8%. If the lender's IRR is 12 %, show the recovery schedule
Amount of loan
1000000
Rate of acceleration
0.08
Lender's IRR
0.12
7 A company wants to structure its repayment of the loan to its core risk, which is measured
by the commodity price index. It wants a loan 20 million to be repaid in six instalments but the
amount of instalment will vary depending on the movements in the commodity price index.
The instalment will go up or down depending on the rate of decrease or increase in the price index
Construct a model to implement this scheme
Amount of loan
2000000
Required irr
0.15
term
6
6

Net Present Value/IRR


year
0
1
2
3
4
5

Cost of Capital
Net Present Value =npv(cost of capital,cash flow range)+initial investment
Internal Rate of Return
=IRR(cashflow range)
9

Year

Cashoutflows

0
1
2
3
4
5
6

Inflows
-100000
-25000
-15000

60000
40000
30000
35000
35000
30000

20000

Cost of capital

0.15

Net present value(NPV)


Internal rate of return(IRR)
10

A hire purchase financier approaches you with the following terms for financing an asset
worth Rs.100,000:
Simple Interest over Rs.100,000
For 1 year, 10%
For 2 years, 20%
For 3 years, 30%
He recovers the total amount (principal + interest) in equal monthly instalments. What is
the effective interest charged by the financier in the 3 cases?

11 The following details are given with reference to a project:

Project Cash Flows


Year
0
1
2
3
4
5
6
7
8
9

Outflows
(200,000.00)
(25,000.00)
(10,000.00)

Inflows
60,000.00
56,000.00
65,000.00
70,000.00
40,000.00
40,000.00

30,000.00
30,000.00
20,000.00

10

21,000.00
COC
NPV
IRR

Determine the following:


A. The NPV at the following costs of capital:
(i) 12%
(ii) 13%
(iii) 14.5%
(iv) 15%
B. The IRR assuming the following initial investments:
(i) 180,000
(ii) 220,000
(iii) 240,000
(iv) 260,000
NPV
Discount
12.00%
13.00%
14.50%
15.00%
IRR

NPV

12.00%

13.00%

Investments
-180000
-220000
-240000
-260000

-180000
-220000
-240000
-260000
12 MIRR(modified internal rate of return)
Check the reinvestment assumption of IRR
0
1
2
3
4
5
IRR
MIRR
13 XIRR(Uneven period cash flows)

-100000
45000
49000
20000
30000
25000

XIRR and XNPV


1-May-00
1-Nov-00
1-Apr-01
1-Oct-01
1-Apr-02
1-Oct-02

-100000
25000
30000
35000
24000
20000

IRR
COC
NPV

0.1

e of money-applications

EMI

$2,075.84

Instalment
25,709.25
25,709.25
25,709.25
25,709.25
25,709.25

16%

Balance
100000
83,290.75
65,077.68
45,225.42
23,586.46
0.00

0
0
0
1
1
Pv of pattern

1
1
1
0
0
Crosscheck

with every instalment


ery schedule

, which is measured
n six instalments but the
mmodity price index.
or increase in the price index

Cashflow pattern
-100000
30000
35000
40000
25000
25000

0.13

Netflows
-100000
35000
25000
30000
35000
35000
30000
20000

cing an asset

0.18

Netflows
(200,000.00)
35,000.00
46,000.00
65,000.00
70,000.00
40,000.00
40,000.00
30,000.00
30,000.00
20,000.00

21,000.00
0.10

14.50%

15.00%

Scenario Analysis

The following details are given with reference to a project:


Project Cash Flows
Year
0
1
2
3
4
5
6
7
8
9
10

Outflows
(197,182.00)
(20,000.00)
(10,000.00)

45,274.00
57,322.00
65,000.00
70,000.00
40,000.00
40,000.00

30,000.00
30,000.00
20,000.00
21,000.00

Consider the following three scenarios


Scenario-1
Investment
-180000
Cost of capital
0.09
First Year Cash in flow
60000
Second Year Cash in flow
60000
Probability

Inflows

0.2

Netflows
(197,182.00)
25,274.00
47,322.00
65,000.00
70,000.00
40,000.00
40,000.00
30,000.00
30,000.00
20,000.00
21,000.00

COC
NPV
IRR

0.10

Scenario-2
-205000
0.11
52000
57000

Scenario-3
-220000
0.14
45000
52000

0.4

0.6

best case

-180000
60000
60000

0.09

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worst case

-220000
45000
52000

0.14

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