Vihaan Vadnere SYBA-B Rollno.

2376
Example Sums of Present Value and Future Value of Ordinary Annuity and Annuity Due.

(a)I am looking ahead to my retirement and want to be able to retire at 70 and hope to live to
95
and make $3200 a month from an account compounding monthly at 4.5%. I am currently 27
and
I am going to deposit $1000 at the beginning of each quarter until I am 70 in an account that
pays 8.5% and is compounded quarterly. Will I have enough to make it happen and by how
much am I above or below?
Find the amount I need to support those requirements from age 70 to 95.
 Solution:

PV = $575713.03 is needed to support me from 70-95 years old.

At depositing 350 per quarter will I have enough?

FV = $596479.44 will be in the account at 70 years old.

I will have enough money to pull 3200 out every month. I will have (596479.44 – 575713.03)
$20766.41 extra in the account
(b)You have just retired and your pensioner agrees to pay you $12,000 per year for the next
20 years, where you receive the first payment today. Assuming the interest rate of 7%,
calculate the closest value of the present value of your payments.

Solution

From the question,

A=12,000

N=20

r=7%

Now, this is an annuity due since the first payment starts today. Using the formula:

PV= $136.027.1429
(c)The amount deposited per year is $1,000 and the account has an effective rate of 3% per
year. It is important to note that the last cash flow is received one year prior to the end of the
5th year.
Solution
(d) X Ltd. issues 12% Debentures of face value Rs. 100 each and realizes Rs. 95 per
Debenture. The Debentures are redeemable after 10 years at a premium of 10%. company is
paying income tax at 50%.
Solution:

Int = Annual interest to be paid i.e. Rs. 12

t = Company’s effective tax rate i.e. 50% or 0.50
RV = Redemption value per Debenture i.e. Rs. 110
N = Number of years to maturity = 10 years SV = issue price per debenture minus floatation
cost i.e. Rs. 95

Kd = [ Int + (RV – SV)/N](1-t)

(RV+SV)/2
= [12 + (110 – 95) / 10] (1 – .5)
(110 + 95) / 2
= [12 + 2.5] (0.5) = 7.25 = 7.43%
97.50 97.50
(e) Y. Ltd. issues 14% preference shares of face value Rs. 100 each Rs. 92 per share. The
shares are repayable after 12 years at par. Note: company is paying income tax at 50%.
Solution:
D = Dividend on Preference share i.e. Rs. 14
SV = Issue Price per share minus floatation cost Rs. 92
N = No. of years for redemption i.e. 12 years
RV = Net price payable on redemption Rs. 100

Kp = D + (RV – SV) / N
(RV + SV) / 2
= 214 (100 – 92) / 12
(110 + 95) / 2
= 14 + .67
95 = 15.28%