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Finance Module

Time Value of Money:


1. A bank is offering a simple annual interest rate of 15% compounded monthly for its monthly recurring deposit. What is the effective yield? What would have been the yield if the interest would have been compounded quarterly and semi-annually respectively? 2. If however, the effective annual interest rate offered by the bank is 15% per year, what is the nominal annual interest rate under monthly compounding? 3. If you put Rs. 10,000 in a savings scheme today at 10%, how much would you end up within 20 years? 4. Suppose you would be having Rs. 1,00,000 10 years from now at 8%. How much is it worth today? What is its worth today if the amount is Rs 1,00,000 8 years from now at 10% 5. Suppose there are two options of savings schemes you can invest in. Scheme A is offered by a bank in which you can put Rs 50,000 at 10% for 15 years. Scheme B offered by a post office savings scheme offers 13% for 21 years for the same Rs 50,000. Which savings scheme would you prefer to invest in? 6. If you borrow Rs. 2,00,000 for a car loan at a 14% simple annual interest rate, what would be your monthly payment on a 5 year loan? If the interest is compounded annually what is your monthly interest payment? 7. You are getting payments of Rs 8000 at the beginning of every year and they are to last another five years. At 6%, what is the value of this annuity? 8. If you put Rs. 5000 in the market at the beginning of every year for 20 years at 10%, how much would you end up with? What if you put the Rs. 5000 in at the end of every year? 9. You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs 16,000 at the beginning of each year for 8 years. Annuity B will pay you Rs 12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and each costs you Rs 75,000 today, which would you prefer? 10. If you want a Rs. 81,00,000 for retirement in 30 years, how much would you have to save by the end of each year if you could make 10% per year? How much would you have to set aside each year if you could put money away starting now?

11. If you are to live 20 years after the retirement, how much you would be able to draw each year if you draw the money at the beginning of the year? (Assume you have been able to save the Rs 81,00,000 you wanted to save at the time of retirement) 12. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for 15 years and start drawing money out of the account in equal annual installments, how much could you draw out each year for 20 years? 13. If you put Rs. 10,000 in the stock market, how many years would it take you to triple your money if the market is making 14% a year? 14. Ramesh will receive Rs.25000 & Rs. 15000 at the end of 14 & 15 year respectively. If the rate of return is 6%. Compute the present value of the amount. 15. An investment that Kiran is considering offers the following cash flows given below: What is the internal rate of return that this investment offers? Year 1 Initial investment of 10,000 Year 2 Inflow of 2,000 Year 3 Inflow of 1,500 Year 4 Additional investment of 5,000 Year 5 Inflow of 2,000 Year 6 Inflow of 2,200 Year 7 Inflow of 1,500 Year 8 Inflow of 1,000 Year 9 Inflow of 1,200 Year 10 Sale proceeds of 17,000

Case Study:

Lets now talk about a couple. John Seymore is a 35 year -old successful engineer and Lily Seymore is a 32 year-old academician working in Delhi. They have a seven year-old daughter Lucy, who is in the first grade, and a two year-old son Joe, who attends the nearby daycare center.

The Seymores will be facing numerous challenges that will require them to practice sound financial decision making, and, in instances where there is a sufficient time horizon, some prudent financial planning. Lily is currently finishing her doctoral

program in Psychology, while maintaining a part-time status at the University where she works. The Seymores own a home, two cars, have approximately Rs 5,00,000 saved up in various savings and investment accounts, and own some assets around the house. They are also invested in their new pension scheme that they maintain at their respective places of employment.

This couple is facing some financial issues that they have not yet addressed. Although they both have jobs where they make decent salaries, they have not really thought about their childrens educational needs. Inflation in the cost of college education is a reality for most parents, which has to be kept in mind when planning for the future. Moreover, Johns mother is in her late seventies, and has been facing declining health. She will not be able to live by herself for much longer. Lily, who originally hails from Mumbai, sends money to her family regularly, but her parents are aging and may need more financial assistance in the future.

Lastly, due to the Seymoress fairly hectic lifestyle, they have not given much thought to their own retirements, or the possibility of how they would handle a layoff from work.

QUESTIONS

1. What are the areas of financial concerns that the Seymores are currently facing? 2. The Seymores are making some financial decisions that will help them in the future. In your estimation, what are the sound decisions theyve already made? 3. College education is increasing at a rate of 3% per year. If college cost is running at Rs 10,00,000 for a 4-year course today, what will the Seymores need to have saved up for Lucy in 11 years and for Joe in 16 years? Assume that the Seymores are in the 30% tax bracket. You can assume that the Seymores earn 9% on their investments. Assume that the Seymores can only save Rs 5000 a month towards each childs educational funding. Is this amount of savings per month sufficient? 4. What is the opportunity cost for the family while Lily is pursuing her Doctorate in Psychology?

Capital Budgeting:
1. Two projects being considered by a firm are mutually exclusive and have the following projected cash flows: Project A Project B Year Cash Flow Cash Flow 0 ($100,000) ($100,000) 1 39,500 0 2 39,500 0 3 39,500 133,000 Based only on the information given, which of the two projects would be preferred, and why? 2. Plan Ltd is considering to purchase a new equipment to replace its existing equipment that has book value of zero and market value of Rs 7,50,000. New equipment costs Rs 45,00,000 and is expected to provide production savings and increased profits of Rs 10,00,000 per year for the next 10 years. New equipment has expected useful life of 10 years, after which its estimated salvage value would be Rs 5,00,000. Straight-line depreciation Effective tax rate: 35% Cost of capital: 14% Should Plan Ltd replace the current equipment?