FMI ASSIGNMENT

TIME VALUE OF VALUE

1) Which would you prefer?
a. An investment paying interest of 12% compounded annually
b. An investment paying interest of 11.7% compounded semiannually
c. An investment paying 11.5% compounded continuously
Work out the returns of each of these investments after 1, 5 and 20 years and advise?
1Compounded annually = FV(rate,nper,0,-PV)
Compounded semiannually = FV( rate/2, nper,0, -PV)
Continuous = PV*EXP(n*r)

2) Mohan started a business on Jan 1 1998 and started depositing Rs 500 every three
months which earns 4% annually but is compounded quarterly. On Dec 31 2000 he used the
entire balance in his bank account in a deposit that pays 9% annually. How much will he have
on Dec 31 2014?
3) Syam will receive the following payments at the end of the first, second and third
years: 2000, 3500, 4500. Then from the end of the fourth through end of tenth year he will
receive an annuity of 5000 per year. At a discount rate of 9% what is the present value of all
the future benefits?
Since, Shyam receives at the end of every year => FV of each year given
Present value = PV(rate,nper,0,PV)
Total = Sum( all PVs)

4) Determine the present value of annuity due of 1000 per year for 10 years compounded
annually at 10%.
PMT given as 1000
End of Period = PV(10%,10,-1000,,0)
Beginning = PV( 10%,10,-1000,,1)

5) Determine the present value of an ordinary annuity of 1000 per year for 10 year where
the cash flow will be starting in the end of 8th year given 10% discounting rate.
7) You are comparing two annuities with equal present values. The applicable discount
rate is 7.5%. One annuity pays Rs 5,000 on the first day of each year for twenty years. How
much does the second annuity pay each year for twenty years if it pays at the end of each
year?
PV value for 1st annuity => first day of each year =PV(7.50%,20,-5000,,1) = 54,795
Annuity = PMT(7.50%, 20, -54795,,0)

8) Baggu receives Rs 100 on the first of each month. Jaggu receives Rs 100 on the last
day of each month. Both Baggu and Jaggu will receive payments for five years. At an 8%
discount rate, what is the difference in the present value of these two sets of payments?

9) You borrow Rs 149,000 to buy a house. The mortgage rate is 7.5% and the loan
period is 30 years. Payments are made monthly. If you pay for the house according to the
loan agreement, how much total interest will you pay?

10) A friend who owns a perpetuity that promises to pay Rs 1,000 at the end of each year,
forever, comes to you and offers to sell you all of the payments to be received after the 25th
year for a price of Rs 1,000. At an interest rate of 10%, what will you pay today to receive
payment from 26th year?
PV of cashflow = PV of perpetuity / [r(1+r) ^t]
PV of perpetuity = c/r = 1000/0.1 =10,000
11) Ramu just decided to save Rs 1,500 a month for the next five years as a safety net for
recessionary periods. The money will be set aside in a separate savings account which pays
3.25% interest compounded monthly. He deposits the first Rs 1,500 today. If he wanted to
deposit an equivalent lump sum today, how much would he deposit?

12) Friendly’s Quick loans, Inc., offers you “three for four or one knock on your door”.
This means you get $3 today and repay $4 when you get your paycheck in one week. What is
the APR that Friendly’s earns on this lending business? If you were brave enough to ask,
what EAR should Friendly’s say you were paying.
No. of weeks = 52

13)Following are the two schemes announced by National Pension System(NPS) in July 2019.

Details Plan A Plan B

Current Age 30 25
EMI Rs 6330 Rs 6330
Investment Horizon 30 years 35 years
Retirement age 60 years 60 years
APR 8% 8%
Cash inflow on 18 lakh 28 Lakh
retirement
Assume that you make Rs 6330 contribution at the beginning of the month for both
Plan A and Plan B. The rest of the maturity value after lump sum payment will be
treated as annuity at 8% till perpetuity. Calculate the monthly pension for Plan A &
Plan B

FV(rate/12,nper*12,-EMI,,1)
Sum of annuity = FV -lumpsum
Annuity = rate/12 * sum of annuity

14) After deciding to buy a new car, you can either lease the car or purchase it with a
three-year loan. The car you wish to buy costs $31,000. The dealer has a special leasing
agreement where you pay $1,500 today and $405 per month for the next three years. If you
purchase the car, you will pay it off in monthly payments over the next three years at an APR
of 6 percent. You believe that you will be able to sell the car for $20,000 in three years.
Should you buy or lease the car? What break-even resale price in three years would make you
indifferent between buying and leasing?
15) Ajay has completed 3 years of service with an MNC. He wanted to do MBA and
started a recurring deposit (RD) for 5 years when he started working, with the objective of
funding his MBA course. The monthly contribution to RD has been Rs 15000 with an APR
of 8.0% compounded monthly. He makes contribution at the end of the month and just
completed 3 years of contributions towards the RD. Currently, Ajay has secured admissions
to IIM Kozhikode. Ajay decided to take a student loan for Rs 25 lakhs. The bank will charge
simple interest of 8.4% per annum for first two years. The repayment of principal and simple
interest accumulated over 2 years will start after the completion of course. After that, an APR
of 8.4% will be charged on the loan. Meanwhile, his father agreed to make the remaining
two-year contribution to his recurring deposit, and on maturity, the entire proceeds from the
deposit will be immediately used for repaying the educational loan. The tenure for repaying
the loan after the completion of the course is 15 years. Compute the EMI Ajay needs to pay
after the loan repayment using RD proceeds?
16)
17) Aegon Life Case(MS Excel Required)
The insurance firm Aegon Life is offering the following scheme. Pay 1 lakh p.a for 6 years
and get 1.35 for next six years
Would you go for this product?

Net PV = -1.04 lakh => I will not prefer this product, not beneficial more outflows than
inflows