Review

Time Value of Money

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 Questions

1. If you invest Rs.5,000 today at a compound interest rate of 9% what will be

its future value after 75 years?

2. Fifteen annual payments of Rs.5,000 are made into a deposit account that
pays 14 percent interest per year. What is the future value of this annuity at
the end of 15 years?

3. If the interest rate is 12% what are the doubling periods as per rule of 72 and
rule of 69 respectively?

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4. An investor is 50 years of age today. He will retire at the age of 60. In order to
receive Rs.2,00,000 annually for 10 years after retirement, how much
amount should he have at the time of retirement? Assume the required rate
of return is 10%.

5. Compute the present value of a perpetuity of Rs.100 a year if the discount rate
is 10%.

6. The earnings of F Ltd. Were Rs.3 per share in year1. they increased over a
10 year period to Rs.4.02. compute the rate of growth or compound annual
rate of growth of the earnings per share.

7. Raja deposits Rs.20,000 in a bank account which pays 10% interest. How much
can he withdraw annually for a period of 15 years?

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8. Shyam borrows Rs.80,000 for a home theatre at a monthly interest of 1.25%
month. The loan is repaid in 12 equal monthly installments, payable at the
end of each month. Prepare a loan amortization schedule.

9. Mr. X has Rs.1,00,000 to deposit in a bank account for 3 years. Assuming

(i) annual compounding, (ii) semi-annual compounding and (iii) quarterly
compounding at a stated annual interest rate of 4%, compute (a) the amount
he would have had at the end of third year, leaving all interest paid on
deposits in the bank (b) effective rate of interest he would earn on each
alternative, and (c) which plan should he choose?

10. An investor wishes to choose the better of the two equally costly cash flows
streams, namely Annuity X (AX) and Annuity Y( AY). While AX is an annuity
due with a cash inflow of Rs.90,000 for each of 6 years, AY is an ordinary
annuity with a cash inflow of Rs.1,00,000 for each of 6years. Assuming 15%
return on investment (a) find the future value at the end of year6 for both AX
and AY and (b) which annuity is more attractive?

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 Answers
1. Rs.32,05,767.343
2. Rs.2,19,21,20,707
3. 6.1 years
4. Rs.12,28,920
5. Rs.1,000
6. 3%
7. Rs.26,295
8. Rs.7221
9. (a) (i) Rs.1,12,500
(a) (ii) Rs.1,12,600
(a) (iii) Rs. 1,12,700
(b) (i) 4%
(b) (ii) 4.04%
(b) (iii) 4.06%
The investor should choose alternative (iii)
10. Rs.9,06,011.92
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