Qn 1 Suppose a stock currently pays a dividend of $1.

10, which is expected to grow at 40% per year for the next fi
What will the dividend be in five years?
Current Dividend 1.1
Growth rate 40%

1 1.54
2 2.156
3 3.0184
4 4.22576
5 5.916064

Qn 2 How much would an investor have to set aside today in order to have $20,000 five
years from now if the current rate is 15% compounded annually?

Present value 9943.53

Qn 3 If we deposit $5,000 today in an account paying 10%, how long does it take to grow to $10,000?

Investment 5000
Interest rate 10% Compounded annually
Years 7.27 Use Goal Seek
Future Value 10,000

Qn 4 Assume the total cost of a college education will be $50,000 when your child enters college in 12 years.
You have $5,000 to invest today. What rate of interest must you earn on your investment to cover the cost o
your child’s education?

Investment 5,000
Interest rate 21.15% Find interest rate
Years 12
Future Value 50,000.00 We wan this to be 50,000

Invested 100
Interest rate 6% for 6 months
End of 6 months 106
End of 1 year 112.36
 Instead if the bank paid 12% for the year
End of 1 year 112

Qn 5 If you invest Rs50 for 3 years at 12% (APR) compounded semi-annually, what will your investment grow to

Investment 50
APR 12%
No of periods in a year 2
Interest rate per period 6%
Future value (at end of 3 years) 70.93
FV (using the equation) 70.93

What is the effective annual rate on this investment?

APR 12.36%
Initial Investment 50
Annual Effective Rate or APY 12.36% Use Goal Seek
FV 70.93

Qn 6 Find the Effective Annual Rate (EAR) of an 18% APR loan that is compounded monthly.
Investment 100
APR 18%
No of periods in a year 12
Interest rate per period 0.015
Future value (at end of 1 year) 119.562
EAR 19.562%

Qn 7 Find the Effective Annual Rate (EAR) of an 18% APR loan that is compounded every day?
Investment 100
APR 18%
No of periods in a year 365
Interest rate per period 0.000493150684932
Future value (at end of 1 year) 119.716
EAR 19.716%

Qn 8 Find the Effective Annual Rate (EAR) of an 18% APR loan that is compounded every hour?
Investment 100
APR 18%
No of periods in a year 8760
Interest rate per period 0.0000205
Future value (at end of 1 year) 119.722
EAR 19.722%

Qn 8a Find the Effective Annual Rate (EAR) of an 18% APR loan that is compounded period becomes infinitesima
FV = C(0)*e^rt (Continuous compounding)
Future Value 119.72174

Investment 100
 APR 18%
No of periods in a year 1000000000
Interest rate per period 0.0000000
Future value (at end of 1 year) 119.722
EAR 19.722%

Qn 9 If you can afford a $400 monthly car payment, how costly a car can you afford if interest rates are 7% APR co
on 36-month loans?
 Interest rate (APR) 7%
Interest rate per period 0.58%
Year 1 2 3
Yearly EMI 400 400 400
Present Value 397.68 395.37 393.08
Sum of PV of all EMIs 12954.59
Sum of PV of all EMIs (Using Equation) 12954.59

Qn 10 What is the present value of a four-year annuity of $100 per year that makes its first payment two years fro
discount rate is 9%?

Interest rate (APR) 9%

Year 0 1 2
Cashflow 100
Present Value at Time 0 84.168
Sum of PV 297.22

Using the Equation, finding the PV at Year 1 323.97

Finding the PV of the cashflow at T=0 297.22
0% per year for the next five years.

w to $10,000?

ded annually

s college in 12 years.
stment to cover the cost of

his to be 50,000

C(0) Annual Percentage rate (APR) 12% Compounded bi-yearly

r Annual Effective rate or Annual Percentage Yield 12.36%
m
T
your investment grow to?

od becomes infinitesimaly small?

erest rates are 7% APR compounded monthly
 4 5 6 7 8 9 10 11 12 13
400 400 400 400 400 400 400 400 400 400
390.80 388.53 386.28 384.04 381.81 379.60 377.40 375.21 373.03 370.87

st payment two years from today if the

3 4 5
100 100 100
77.21835 70.84252 64.99314
ded bi-yearly
 14 15 16 17 18 19 20 21 22 23
400 400 400 400 400 400 400 400 400 400
368.72 366.58 364.45 362.34 360.24 358.15 356.07 354.01 351.96 349.91
 24 25 26 27 28 29 30 31 32 33
400 400 400 400 400 400 400 400 400 400
347.88 345.87 343.86 341.87 339.88 337.91 335.95 334.01 332.07 330.14
 34 35 36
400 400 400
328.23 326.32 324.43
 FFMFM Session 8

Qn 1

Qn 2 What is your opportunity cost?

If you had invested in SBI (another bank with similar risk), if you would have obtained 7% on that investmen

Lets say you Rs.100,000 to invest. You have 2 options to invest - SBI with 7% pa and Cooperative Bank with 9
Look at the risk of these banks. If same, invest in the Cooperative Bank which gives you higher interest. Else

Qn 3 Lets say you invested Rs.1000 each in SBI at 7% p.a. and the Cooperative Bank at 9% pa.
How much would you get from these banks at the end of 1 year?
SBI 1070.00
Cooperative Bank 1090.00
How much money do you need to invest now to obtain Rs.1000 at the end of 1year from each of these bank
Present value of Rs.1000 at Year 1 - SBI 934.58
Present value of Rs.1000 at Year 1 - Coop 917.43

How much would you get from these banks at the end of 2 years? (assume yearly compounding)
 SBI 1144.9
Cooperative Bank 1188.1
How much money do you need to invest now to obtain Rs.1000 at the end of 2 years from each of these ban
Present value of Rs.1000 at Year 2 - SBI 873.44
Present value of Rs.1000 at Year 2 - Coop 841.68

Qn 3 Lets say a friend asked you for a Rs.1000 loan for 2 years
You tell him that you require a return on 7% for the money loaned
(because SBI provides 7% return on deposits for 1 year)

Your friend says that he can pay you back in two installments
End of Year 1 End of Year 2
Case A 350 765
Case B 465 650
Would you accept his payback schedule?
Using Present value of cashflows
End of Year 1 End of Year 2
Case A 327.10 668.18
Case B 434.58 567.74

Qn 4 How much will you pay for a lottery??

Lets say I am going to set up a lottery. Total participants are capped at 25 and the prize money is Rs.1000.
The lottery will be conducted tomorrow at 4pm.
How much will you be willing to pay for the lottery today?

X has purchased the lottery from Y for Rs.40

Next day, after the results are announced, Y gets to know that X has won the lottery

Qn 5 A company is considering investing in a riskless project costing $100. The project received $107 in 1 year and
Calculate the NPV of the project?
Year 0 Year 1
Cashflows -100 107
Present value of all these cashflows -100 100.94
Net Present Value of all cashflows 0.94
 What if the required rate of interest is 10 per cent?
Year 0 Year 1
Cashflows -100 107
Present value of all these cashflows -100 97.27
Net Present Value of all cashflows -2.73

Capital Budgeting Techniques

Payback Period method
NPV
IRR
Profitability Index

Qn 6 Project Cashflows Year 0 Year 1

Project A -50,000 30,000
Project B -50,000 10,000

How long does it take you to recoup your investment in Project A?

Ans - End of Year 2

Disadvantages
Ignores time value of money
Ignore all cashflows which happen after the payback period ends
Positive and negative cashflow across time - then not a good method

Calculating NPV of these projects required rate 10%

Project Cashflows Year 0 1
Project A -50,000 27,273
Project B -50,000 9,091

Qn 7 Project Cashflows Year 0 Year 1

Project A -200 100

IRR tells you the rate at which the NPV of a project becomes zero
Advantage here being that you don’t require to calculate the required rate of return on the project in advan

Required rate of return (guessing) 30.00% IRR

Year 0 1
Present value of Cashflows -200 76.92
NPV -18

Discount Rate NPV

5% 72
10% 49
15% 28
20% 11
25% -5
 30% -18

Qn 8 Project Cashflows Year 0 1

Project A -100 130
(-100, 130)
Present value of cashflows -100 100.00
NPV 0

Qn 9 Project Cashflows Year 0 1

Project A 100 -130
(-100, 130)
Present value of cashflows 100 -92.86
NPV 7

Discount Rate NPV

5% -24
10
10% -18
15% -13 5
20% -8 0
25% -4 0% 5% 10% 15%
30% 0 -5

35% 4 -10
40% 7
-15

-20

-25

-30

Qn 9 Project Cashflows Year 0 1

Project A -100 230
(-100, 130)
Present value of cashflows -100 164.29
NPV -3.06

Discount Rate NPV

5% -0.680
0.500
10% 0.000
15% 0.189 0.000
0% 5% 10% 15%
20% 0.000 -0.500
25% -0.480
30% -1.183 -1.000

35% -2.058 -1.500

40% -3.061
-2.000

-2.500

-3.000

-3.500
-1.000

-1.500

-2.000

-2.500

-3.000

-3.500
ed 7% on that investment, then 7% is your opportunity cost.

d Cooperative Bank with 9% pa. Where would you have invested?

you higher interest. Else decide based on the risk return tradeoff.

r from each of these banks

compounding)
ars from each of these banks

If invested in SBI 1144.9

CF1 CF2
End of Year 2 End of Year 2 Total CF at Year 2
1115 374.50 765 1139.50
1115 497.55 650 1147.55

Sum of PV
995.28
1002.31

prize money is Rs.1000.

eceived $107 in 1 year and has no other cash flows. The required interest rate is 6%.
 Year 2 Year 3 Year 4 Year 5
20,000 10,000
20,000 30,000 40,000 60,000

2 3 4 5 NPV
16,529 7,513 1,315
16,529 22,539 27,321 37,255 62,735

Year 2 Year 3
100 100

n on the project in advance

NPV
2 3
80
59.17 45.52
60

40

20

0
0% 5% 10% 15% 20% 25% 30% 35%

-20

-40
 20

0
0% 5% 10% 15% 20% 25% 30% 35%

-20

-40

2 3 IRR
30%

0.00 0.00

2 3 IRR
40%

0.00 0.00

NPV

5% 10% 15% 20% 25% 30% 35% 40% 45%

2 3 IRR
-132 40%

-67.35 0.00

NPV

5% 10% 15% 20% 25% 30% 35% 40% 45%

 FFMFM Session 9
Topics covered so far - Present and future values, Finding PV of multiple cashflows, Methods of capital budg

Session focus - Methods of Capital Budgeting (IRR, Issues with IRR, Profitability Index), Valuing a firm, Simulation on Capital Bu

Qn 1 Project Cashflows Year 0 Year 1

Project A -200 100

IRR tells you the rate at which the NPV of a project becomes zero
Advantage here being that you don’t require to calculate the required rate of return on the project in advan

Required rate of return (guessing) 23.38% IRR

Year 0 1
Present value of Cashflows -200 81.05
NPV 0

Discount Rate NPV

5% 72
10% 49
15% 28
20% 11
25% -5
30% -18

Qn 2 Project Cashflows Year 0 1

Project A -100 130
(-100, 130)
Present value of cashflows -100 100.00
NPV 0

Qn 3 Project Cashflows Year 0 1

Project A 100 -130
(-100, 130)
Present value of cashflows 100 -92.86
NPV 7

Discount Rate 7
5% 12.00
10%
10.00
15%
20%
8.00
25%
30% 6.00
35%
4.00

2.00
 8.00

6.00

40% 4.00

2.00

0.00
0% 5% 10% 15%

Qn 4 Project Cashflows Year 0 1

Project A -100 230
(-100, 230, -132)
Present value of cashflows -100 209.09
NPV 0.00

Discount Rate 0.00

5%
12.000
10%
15% 10.000
20%
25% 8.000
30%
35% 6.000

40%
4.000

2.000

0.000
0% 5% 10% 15%

Qn 4 Project Cashflows Year 0 1

Issues with Investment A -1 1.50
Scale Investment B -10 11.00

Qn 5 Project Cashflows Year 0 1

Issues with Project A -10 40
Scale Project B -25 65

Incremental cashflows
Project B - Project A -15 25

Qn 6 Project Cashflows Year 0 1

Issues with Investment A -10,000 10,000
Timing Investment B -10,000 1,000

Discount Rate (Re)

Present value of the Cash flows Year 0 1
 Investment A -10,000 9,091
Investment B -10,000 909

NPV of Project A
Discount Rate 669 insert this from G95
0% select all and go to data table and in
5%
10%
15%
20%
25%
30%
35%
40%

NPV of Project B
Discount Rate 751
0%
5%
10%
15%
20%
25%
30%
35%
40%
Methods of capital budgeting (Payback period, NPV)

Simulation on Capital Budgeting

Year 2 Year 3
100 100

n on the project in advance

NPV
80
2 3
60 65.70 53.25

40

20

0
0% 5% 10% 15% 20% 25% 30% 35%

-20

-40

2 3 IRR
30%

2 3 IRR
40%

7
 5% 10% 15% 20% 25% 30% 35% 40% 45%

2 3 IRR
-132 10%

-109.09

Chart Title

% 5% 10% 15% 20% 25% 30% 35% 40% 45%

NPV at 1% IRR
0.485 50%
0.891 10%

NPV at 25% IRR NPV at IRR

22.00 300% 0.00
27.00 160% 0.00

5.00 67% 0.00

2 3 NPV at 0% NPV at 10% NPV at 15% IRR

1,000 1,000 2,000.00 668.67 109.00 16.04%
1,000 12,000 4,000.00 751.31 -484.00 12.94%
Large cashflow at the later year means higher discounting hence the senstibity of df is very higher
compared to lower cf at the later years
2 3 NPV
 826 751 669
826 9,016 751

nd go to data table and in second row select L90

 Disc Rate
10%
10%
stibity of df is very higher as
 FFMFM Session 10
Topics covered so far - Present and future values, Finding PV of multiple cashflows, Methods of capital budg

Session focus - Issues with IRR, Capital Rationing, Profitability Index

Qn 1 Project Cashflows Year 0 Year 1

Project A -100 50
Project B -100 20

Expected Discount rate 10%

Year 0 1
Present Value of Cash flows - Project A -100.00 45.45
Present Value of Cash flows - Project B -100.00 18.18

NPV of Project A
Discount Rate 29
0%
5%
10%
11%
15%
20%
24%
25%
30%

NPV of Project B
Discount Rate 30
0%
5%
10%
11%
15%
20%
24%
25%
30%

Qn 2 Project Cashflows Year 0 Year 1

Project A -20 70
Project B -10 15
Project C -10 -5

Expected Discount rate 12%

 Year 0 1
Present Value of Cash flows - Project A -20.00 62.50
Present Value of Cash flows - Project B -10.00 13.39
Present Value of Cash flows - Project C -10.00 -4.46

When to use PI?

Qn 3 Present Value of a firm

End of the Year Net Cashflow to the FirmPresent Value Factor

1 5000 0.909090909090909
2 2000 0.826446280991735
3 2000 0.751314800901578
4 2000 0.683013455365071
5 2000 0.620921323059155
6 2000 0.564473930053777
7 10,000 0.513158118230706
Present Value of the Firm
Stock price
Methods of capital budgeting (Payback period, NPV, IRR)

Year 2 Year 3 Year 4

40 40 30
40 50 60

2 3 4 NPV IRR
33.06 30.05 20.49 29.06
33.06 37.57 40.98 29.79

Foundations in Financial Management and Fin

(Capital Budgeting- Section 4)
https://hbsp.harvard.edu/import/778089

Year 2
10
40
60
 2 NPV IRR PI
7.97 50.47
31.89 35.28
47.83 33.37

PV of Net Cash Flows Discount rate

4545.45 10%
1652.89
1502.63
1366.03
1241.84
1128.95
5131.58
16569.38
16.57
ncial Management and Financial Markets

d.edu/import/778089