Formula

Simple Interest Interest (I) I = PNR/100

Maturity Value (A) A=P+I
Compound Maturity Value (A) A = P (1+r)n
Interest (Compounded Annually)

( )
Maturity Value (A) r
2n

(Compounded Semi-Annually) A=P 1+

2

( )
Maturity Value (A) r
4n

(Compounded Quarterly) A=P 1+

4

( )
Maturity Value (A) r 12n
(Compounded Monthly) A=P 1+
12

( )
Maturity Value (A) r 52n
(Compounded Weekly) A=P 1+
52
Maturity Value (A) A=P∗e rt

(Compounded Continuously)
Interest (I) I=A-P
Calculating A / (1+r)n = P
Present Value
Future Value of Usage: Ordinary Annuity : When amount is
Annuity 1. Calculate the maturity value of investment paid at the end of each year:
2. To determine the amount to be invested for A∗[ ( 1+ r )n−1 ]
each period so as to accumulate Certain FVA=
amount at the end of the period r
3. To compare different investment plans by
calculating the future value under each plan Annuity Due = When amount is paid at
4. To determine ‘annual savings’ so to know the beginning of each year:
A∗[ ( 1+ r ) −1 ]
n
your ‘retirement balance’
FVA= ∗(1+ r )
5. Sinking fund :To accumulate an amount r
every period so as to generate funds for
future obligation (e.g. redemption of
debentures)
Present Value of
an Annuity
1. To determine the amount to be borrowed
considering the capacity for Repayment
2. To find the instalment considering the loan PVA=
[
A∗ 1−{
1
( 1+r )n ]
}

amount r
3. Comparison between purchase and leasing

Extra Questions on Time Value of Money

Q.1. Rahul invested Rs.70000 in a bank at the rate of 6.5% p.a. simple interest rate. He received
Rs.85925 after the end of term. Find out the period for which sum was invested by Rahul.
Ans: Given,
P = Investment = 70,000
R= Interest rate = 6.5%p.a.
A = Maturity value = 85,925
N = Period of investment

A = P + Interest
A = P + (PNR)
85,925 = 70,000 + (70,000*6.5%*N)
15,925 = 4,550*N
N = 15,925/4550
N = 3.5 years

Q.2. What sum of money will produce Rs.28600 interest in 3 years and 3 months at 2.5% p.a. simple
interest?
Ans: Given
P = Investment = ?
R= Interest rate = 2.5%p.a.
N = Period of investment = 3 years and 3 months = 3.25 years = 3*12+3=39/12
I = Interest = Rs. 28,600

I = PNR
28,600 = P * 3.25 * 2.5%
P = 28,600 / 3.25 * 2.5%
P = 3,52,000

Q.3. Rs.16000 invested at 10% p.a. compounded semi-annually amounts to Rs.18522.

Find the time period of investment.
Ans: Given
P = Investment = 16,000
R= Interest rate = 10%p.a.=0.1/2= 0.05
N = Period of investment = ?
A = Maturity Value = 18,522
A=P¿ )2n
18,522=16,000 ¿)2n
18,522
=¿)2n
16,000
1.157625=¿)2n
¿)3¿ ¿)2n
3 = 2N
N = 1.5 years
Alternative method
1.157625=¿)2n
Taking log of both sides
log 1.157625 = log¿)2n
log 1.157625 = 2n*log¿)
0.06357 = 2n * 0.02119
2n= 0.06357/0.02119
2n = 3
N = 1.5

Q.4. Find the compound interest and effective rate of interest if an amount of Rs.20000
is deposited in a bank for one year at the rate of 8% per annum compounded semi-annually.
Ans: Given
P = Investment = 20,000
R= Interest rate = 8%p.a.=0.08/2= 0.04
N = Period of investment = 1 year = 1*2 = 2
A = Maturity Value = ?
A=P¿ )2n
A=20,000 ¿)2
A=20,000 ¿)2
A=21,632
Interest = A – P
Interest = 21,632-20,000 = 1,632
Effective rate of interest
Total Interst
Effective rate= * 100
Investment

1,632
Effective rate= * 100 = 8.16%
20,000
Alternatively
Effective rate=¿)2n ¿ ¿)2 = 1.0816 = 8.16%
FV = PV (1+r)n

Q.5. Y bought a TV costing Rs. 13000 by making a down payment of Rs. 3000 and agreeing to make
equal annual payment for four years. How much would be each payment if the interest on unpaid
amount be 14% compounded annually?
Ans:
Net amount payable = Cost of asset – Down payment
=13000 – 3000
= 10,000
PVA = Present value of Annuity = 10,000
A = Annual Payment
R = Rate of interest = 14%
N= period = 4 years

PVA=
[
A∗ 1−{
1
( 1+r )n
}
]
r

10,000=
A∗ 1−{
[ 1
( 1.14 )4
}
]
0.14
10,000= A∗2.9137
A = Rs.3,432.06

Q.6. ABC Ltd. wants to lease out an asset costing Rs. 360000 for a five year period. It
has fixed a rental of Rs. 105000 per annum payable annually starting from the end of first
year. Suppose rate of interest is 14% per annum compounded annually on which money can
be invested by the company. Is this agreement favourable to the company?
Ans:
PVA = Present value of Annuity = ?
A = Annual Payment = 1,05,000
R = Rate of interest = 14%
N= period = 5 years

PVA=
1,05,000∗ 1−{
[ 1
( 1.14 )5 ]
}

0.14
PVA=¿ 3,60,473.50 (PV of lease rent)
Cost of the asset = 3,60,000
Since there is net gain of 473.50, it is advisable to give asset on lease basis.

Q.7. A company is considering proposal of purchasing a machine either by making full payment of
Rs.4000 or by leasing it for four years at an annual rate of Rs.1250. Which course of action is
preferable if the company can borrow money at 14% compounded annually?
Ans:
PVA = Present value of Annuity = ?
A = Annual Payment = 1,250
R = Rate of interest = 14%
N= period = 4 years

PVA=
[
1,250∗ 1−{
1
( 1.14 ) 4 ]
}

0.14
PVA=¿ 3,642.14 (PV of lease rent)
Purchase = 4,000
Since the amount payable in less in case of lease option, it is advisable to take asset on lease basis.

Q.8. A machine with useful life of seven years costs Rs. 10000 while another machine with useful
life of five years costs Rs. 8000. The first machine saves labour expenses of Rs. 1900
annually and the second one saves labour expenses of Rs. 2200 annually. Determine the
preferred course of action. Assume cost of borrowing as 10% compounded per annum.
Ans:
Net cost of asset = Purchase price – PVA (present value of future savings)
Machine 1 (10,000)

Net cost of asset = 10,000 –

1,900∗ 1−{
[ 1
( 1.10 )7
}
]
0.10

= 10,000 – 9,250
= 750

Machine 2 (8,000)

Net cost of asset = 8,000 – [

2,200∗ 1−{
1
( 1.10 )5
}
]
0.10

= 8,000 – 8,340
= (340) Gain on purchase of asset
Since there is a net gain of Rs. 340 on purchase of Machine 2, it is advisable to purchase Machine of
Rs. 8,000

Q.9. Mr. Santosh has started business with Rs. 8,00,000 as an initial investment and is expecting
following cashflows for next 5 years. Calculate the present value of cashflows if the discounting
factor is 12%
1,75,000 FV FV FV FV
PV = 1
+ + + +
(1.12 ) ( 1+r ) ( 1+r ) ( 1+r ) ( 1+r )5
2 3 4

Year Cashflow Discounting Factor PV of cashflows

FV
( 1.12 )n
1 1,75,000 0.8929 1,56,258
2 2,10,000 0.7972 1,67,412
3 3,75,000 0.7118 2,66,925
4 2,40,000 0.6355 1,52,520
5 1,50,000 0.5674 85,110
Total Present Value 8,28,225
of Inflows
Investment 8,00,000
 Net present value 28,225

Q.10. MR. X is Investing Rs. 15,000 at the end of each year @ 12% interest rate for 20 years then
what is the maturity value?
Ans: Given,
A = Annual Investment = 15,000
R = Rate of interest = 12% = 0.12
N = Period = 20 years
FVA = Future value of Annuity i.e. maturity value of investment =?
A∗[ ( 1+ r )n−1 ]
FVA=
r
15,000∗[ (1+ 0.12 )20−1 ]
FVA=
0.12
15,000∗[ (1.12 )20−1 ]
FVA=
0.12
FVA=10,80,787

Q.11. MR. X is Investing Rs. 15,000 at the beginning of each year @ 12% interest rate for 20 years
then what is the maturity value?
A∗[ ( 1+ r )n−1 ]
FVA= ∗(1+ r )
r
15,000∗[ (1.12 ) −1 ]
20
FVA= ∗(1.12)
0.12
FVA=10,80,787∗(1.12)
FVA=12,10,481.4

Q.12. MR. X want to purchase a house worth Rs. 75,00,000 at the end of 10 years. How much
amount is required to be invested at the end of each year if rate of interest is 12%?
What will be your answer if the amount is invested at the beginning of each year?
A∗[ ( 1+ r )n−1 ]
FVA=
r
A∗[ ( 1.12 )10−1 ]
75,00,000=
0.12

A = 4,27,381.23

A∗[ ( 1+ r )n−1 ]
FVA= ∗(1+ r )
r
A∗[ ( 1.12 )10−1 ]
75,00,000= ∗(1.12)
0.12
75,00,000= A∗¿ 19.654583

A = 3,81,590.385