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4. Saving Rs.2000 a year for 5 years and Rs.3000 a year for 10 years thereafter is
equivalent to saving Rs.2000 a year for 15 years and Rs.1000 a year for the years
6 through 15.
Hence the savings will cumulate to:
2000 x FVIFA (10%, 15 years) + 1000 x FVIFA (10%, 10 years)
= 2000 x 31.772 + 1000 x 15.937 = Rs.79481.
(5.000 – 4.411) x 2%
r = 16% + = 17.4%
(5.234 – 4.411)
8. The present value of Rs.10,000 receivable after 8 years for various discount rates
(r ) are:
r = 10% PV = 10,000 x PVIF(r = 10%, 8 years)
= 10,000 x 0.467 = Rs.4,670
10. The present value of an annual pension of Rs.10,000 for 15 years when r = 15%
is:
10,000 x PVIFA (15%, 15 years)
= 10,000 x 5.847 = Rs.58,470
Obviously, Mr. Jingo will be better off with the annual pension amount of
Rs.10,000.
14. To earn an annual income of Rs.5,000 beginning from the end of 15 years from
now, if the deposit earns 10% per year a sum of
Rs.5,000 / 0.10 = Rs.50,000
is required at the end of 14 years. The amount that must be deposited to get this
sum is:
Rs.50,000 / FVIF (10%, 14 years) = Rs.50,000 / 3.797 = Rs.13,165
= 15.1%
= Rs.2590.9
Similarly,
PV (Stream B) = Rs.3,625.2
PV (Stream C) = Rs.2,851.1
19 A B C
Stated rate (%) 12 24 24
20. Investment required at the end of 8th year to yield an income of Rs.12,000 per
year from the end of 9th year (beginning of 10th year) for ever:
Rs.12,000 x PVIFA(12%, ∞ )
= Rs.12,000 / 0.12 = Rs.100,000
To have a sum of Rs.100,000 at the end of 8th year , the amount to be deposited
now is:
Rs.100,000 Rs.100,000
= = Rs.40,388
PVIF(12%, 8 years) 2.476
21. The interest rate implicit in the offer of Rs.20,000 after 10 years in lieu of
Rs.5,000 now is:
Rs.5,000 x FVIF (r,10 years) = Rs.20,000
Rs.20,000
FVIF (r,10 years) = = 4.000
Rs.5,000
If the inflation rate is 8% per year, the value of Rs.26,530 10 years from now, in
terms of
the current rupees is:
Rs.26,530 x PVIF (8%,10 years)
= Rs.26,530 x 0.463 = Rs.12,283
23. A constant deposit at the beginning of each year represents an annuity due.
PVIFA of an annuity due is equal to : PVIFA of an ordinary annuity x (1 + r)
To provide a sum of Rs.50,000 at the end of 10 years the annual deposit should
be
Rs.50,000
A = FVIFA(12%, 10 years) x (1.12)
Rs.50,000
= = Rs.2544
17.549 x 1.12
24. The discounted value of Rs.20,000 receivable at the beginning of each year from
2025 to 2029, evaluated as at the beginning of 2024 (or end of 2023) is:
Rs.20,000 x PVIFA (12%, 5 years)
= Rs.20,000 x 3.605 = Rs.72,100.
If A is the amount deposited at the end of each year from 2015 to 2020 then
A x FVIFA (12%, 6 years) = Rs.51,335
A x 8.115 = Rs.51,335
A = Rs.51,335 / 8.115 = Rs.6326
25. The discounted value of the annuity of Rs.2000 receivable for 30 years, evaluated
as at the end of 9th year is:
Rs.2,000 x PVIFA (10%, 30 years) = Rs.2,000 x 9.427 = Rs.18,854
Assuming that the monthly interest rate corresponding to an annual interest rate of
12% is 1%, the discounted value of an annuity of Rs.1800 receivable at the end of each
month for 180 months (15 years) is:
Rs.1800 x PVIFA (1%, 180)
(1.01)180 - 1
Rs.1800 x ---------------- = Rs.149,980
.01 (1.01)180
If Mr. Ramesh borrows Rs.P today on which the monthly interest rate is 1%
P x (1.01)60 = Rs.149,980
P x 1.817 = Rs.149,980
Rs.149,980
P = ------------ = Rs.82,540
1.817
= 1.53%
29. Let `n’ be the number of years for which a sum of Rs.20,000 can be withdrawn
annually.
5.000 – 4.868
n=7+ ----------------- x 1 = 7.3 years
5.335 – 4.868
31. Define n as the maturity period of the loan. The value of n can be obtained from
the equation.
32. Expected value of iron ore mined during year 1 = Rs.300 million
Expected present value of the iron ore that can be mined over the next 15 years
assuming a price escalation of 6% per annum in the price per tone of iron
1 – (1 + g)n / (1 + i)n
= Rs.300 million x ------------------------
i-g
1+g n
1 - -------
(b) 1+r
PV = A(1+g) ----------------- = 12 x 0.9725 / 0.15 = Rs.77.8 million
r- g
35. It may be noted that if g1 is the growth rate in the no. of units and g2 the growth
rate in price per unit, then the growth rate of their product, g = (1+g1)(1+g2) - 1
In this problem the growth rate in the value of oil produced, g = (1- 0.05)(1
+0.03) - 1 = - 0.0215
1+g n
1 - -------
1+r
PV = A(1+g) -----------------
r- g
= $ 16,654,633
36.
The growth rate in the value of the oil production g = (1- 0.06)(1 +0.04) - 1
= - 0.0224
1+g n
1 - -------
1+r
PV = A(1+g) -----------------
r- g
= $ 30,781,328.93
= Rs. 9,434,536
38
Assuming 52 weeks in an year, the effective interest rate is
52
0.08
1 + - 1 = 1.0832 - 1 = 8.32 percent
52
MINICASE--1
Solution:
2. How much money should Ramesh save each year for the next 15 years to be able
to meet his investment objective?
This means that his savings in the next 15 years must grow to :
3. How much money would Ramesh need when he reaches the age of 60 to meet his
donation objective?
46
1 2 15
15
1.12
1–
1.08
= 400,000
0.08 – 0.12
= Rs.7,254,962
MINICASE--2
Solution: 1)
Re.1 deposit each at the
end of month 0 1 2 3 4 5 6 9 12 40 44
MBA expenses for year I at present = 20 lakhs. After 10 years it would be = 20(1+0.05)10 =
32.58 lakhs
MBA expenses for year II at present = 25 lakhs. After 11 years it would be = 25(1+0.05) 11 =
42.76 lakhs
At the end of 3 months, each 1 Rupee deposited in the RD account becomes = FVIFA(0.08/12,3)
= [{(1+0.08/12)3 -1} / (0.08/12)] x (1+0.08/12) = {(1.00667)3-1}/0.00667 x 1.00667 = Rs.3.0402
which when compounded quarterly becomes at the end of 10 years = 3.0402 x [(1+0.08/4)4x10 -
1]/ (0.08/4)
= 3.0402 x [(1.02)40 – 1] / 0.02 = Rs.
183.634
For a RD maturity value of Rs.183.634 if the deposit to be made is Rs.1, for a maturity value of
Rs.32.58 lakhs, the monthly deposit to be made will be = 32,58,000/183.634 = Rs.17,742
Similarly for a maturity value of Rs.42.76 lakhs the monthly deposit needed .will be
= 42,76,000 / [3.0402 x {(1.02)44 – 1} / 0.02] = Rs. 20,236
2)
Amount required for Jasleen’s marriage at the end of 20 years = Rs.300 lakhs
Cumulative fixed deposit to be made now to get the above amount = 300,00,000 / (1+0.08/4)4x20
= Rs.61,53,292
3)
Annuity Period
Year end 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
19 20
What deposit? Annuity Payments 12L 12L 12L 12L 12L 12L 12L 12L
12L 12L
Annuity needed per annum at the beginning of each year in real terms after 10 years =
Rs.12 lakhs
With inflation at 5 percent, in nominal terms, this may be considered as a growing
annuity for
10 years at a growth rate of 5 percent and discount rate of 10 percent.
Present value of the annuity , as at the beginning of the 10th year from now
= 12,00,000 x (1+0.05)[ 1 –(1+0.05)/(1+0.10)10 /(0.10-0.05)] = Rs.93,74,163
Amount to be deposited in cumulative fixed deposit now, to have a maturity value of
Rs.93,74,163 at the end of 9 years = 93,74,163/(1+0.08/4)4x9 = Rs.45,95,432