Practical Problems on Application of TVM

1. A company issued Rs.5,00,000 debentures redeemable at a premium of 10% after 6

years. In order to facilitate redemption, the company wants to accumulate the desired
amount of funds by making equated investments, (bearing 9% p.a. as the rate of
interest) at the end of each year from now. Find out the amount of equated annual
investment for this purpose.
2. A man requires Rs.20, 00,000 to purchase a house after 5 years. He has an opportunity
to invest the funds in an account which can earn 6% p.a. compounded quarterly. Find
how much must be deposited in each quarter so as to have the required amount at the
end of 5 years.
3. Mr. Raghav purchased a house for Rs. 75, 00,000 and has arranged 80% loan from a
bank for this purpose at 12% p.a. He proposes to repay the loan in 12 years by quarterl y
compounded installment. PVAF (3%,48)=25.2667; PVAF (3%,36)=25.2667
Find out the equated Installment?
What is total interest paid during the first three years?
4. Rohan borrowed Rs.20, 00,000 from a bank at 12% p.a. to be repaid in 12 equated
yearly installments compounded annually. PVAF (12%,12)=6.1944
Find out the equated Installment?
If after 8 years, he wants to settle his loan account by paying the capital amount due.
Find out the amount, he should pay to the lender in full and final settlement of loan
account?
5. A person has two options to buy deep discount bonds (DDB):
(i) Rs.10, 000 each with a maturity value of Rs. 21,800 at the end of 8th year.
(ii) Rs.10, 000 each with maturity period of Rs. 18,500 at the end of 6th year.
Which option he should exercise on the basis of the implicit rate of return?

6. A person has two options to buy deep discount bonds (DDB) for:
(i) Rs. 5,000 each with a maturity period of Rs. 11,000 at the end of 8th year.
(ii) Rs. 5,000 each with a maturity period of Rs. 9,000 at the end of 6th year.
Which option he should exercise on the basis of the implicit rate of return?

7. A depositor is entitled to receive 9% p.a. as interest on the fixed deposit made with a
nationalized bank. The bank credits the interest on fixed deposit account thrice a year.
What is the effective rate of interest on fixed deposit.
8. A depositor is entitled to receive 9% p.a. as interest on the fixed deposit made with a
nationalized bank. The bank credits the interest on fixed deposit account thrice a year.
What is the effective rate of interest on fixed deposit.

9. A 12 payment annuity of Rs. 9,000 shall begin at the end of 6 years from now. What is
the present value of this annuity now if the discount rate is 10% p.a.?

10. A 10 payment annuity of Rs. 10,000 shall begin at the end of 5 years from now. What is
the present value of this annuity now if the discount rate is 12% p.a.?

11. A person is contemplating to install a photocopying machine at a cost of Rs.10,00,000

with a productive life span of 6 years during which the machine is to be maintained by
the supplier free of cost. He knows that on an average, he can photocopy 3000 pages
per day and charge 50 paise for each page from the customers. The toner cartridge
needs replacement after 5000 pages at a cost of Rs. 500. A loan can be obtained to buy
this machine at 9% p.a. effective. Find out whether the purchase of this machine is
worthwhile or not, assuming that the machine will be put to use in a year for 360 days?

12. A person is contemplating to install a photocopying machine at a cost of Rs. 10,50,000

with a productive life span of 5 years during which the machine is to be maintained by
the supplier free of cost. He knows that on an average, he can photocopy 4000 pages
per day and charge 35 paise for each page from the customers. The toner cartridge
needs replacement after 5000 pages at a cost of Rs. 800. A loan can be obtained to buy
this machine at 10% p.a. effective. Find out whether the purchase of this machine is
worthwhile or not, assuming that the machine will be put to use in a year for 360 days?

13. Mr. Mohan requires Rs. 60,000 annually during the first 6 years and thereafter Rs.
90,000 annually forever. Calculate the amount he should invest @ 12% p.a. to get these
annuities.

14. Mrs. Preeti requires Rs. 75,000 annually during the first 5 years and thereafter Rs.
1,20,000 annually forever. Calculate the amount he should invest @ 10% p.a. to get
these annuities.

15. A person is contemplating an investment of Rs. 6,80,000 with a required rate of return
of 12%. He has the following options:
1) to receive Rs.19,00,000 at the end of 9th year;
2) to get perpetuity of Rs. 84,000 per annum from the end of Ist year;
3) to get perpetuity of Rs.70,000 from end of 4th year with annual growth of 5%;
4) to receive Rs. 1,06,000 per year for a period of 14 years;
5) to receive Rs. 70,000 semi-annually for 5 years and thereafter Rs.3,75,000 at the
end of 6th year.
Decide which option he should choose for this investment.