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2.
8%
FV5
=
=
10%
FV5
=
=
12%
FV5
=
=
15%
FV5
=
=
3.
In 12 years Rs.1000 grows to Rs.8000 or 8 times. This is 2 3 times the initial
deposit. Hence
doubling takes place in 12 / 3 = 4 years.
According to the Rule of 69, the doubling period is:
0.35 + 69 / Interest rate
Equating this to 4 and solving for interest rate, we get
Interest rate = 18.9%.
4.
Saving Rs.2000 a year for 5 years and Rs.3000 a year for 10 years thereafter is
equivalent to saving Rs.2000 a year for 15 years and Rs.1000 a year for the years
6 through 15.
Hence the savings will cumulate to:
2000 x FVIFA (10%, 15 years) + 1000 x FVIFA (10%, 10 years)
=
2000 x 31.772 + 1000 x 15.937
=
Rs.79481.
5.
6.
1,000,000
1,000,000
Rs.56,983.
10,000
10,000 / 1000 = 10
=
=
9.930
10.980
x 4% = 20.3%
(10.980 9.930)
7.
=
=
5,000
5,000 / 1000 = 5
4.411
5.234
= 17.4%
(5.234 4.411)
8.
9.
The present value of Rs.10,000 receivable after 8 years for various discount rates
(r ) are:
r = 10%
PV
= 10,000 x PVIF(r = 10%, 8 years)
= 10,000 x 0.467 = Rs.4,670
r = 12%
PV
r = 15%
PV
The present value of an annual pension of Rs.10,000 for 15 years when r = 15%
is:
10,000 x PVIFA (15%, 15 years)
= 10,000 x 5.847 = Rs.58,470
The alternative is to receive a lumpsum of Rs.50,000.
Obviously, Mr. Jingo will be better off with the annual pension amount of
Rs.10,000.
11.
12.
13.
14.
To earn an annual income of Rs.5,000 beginning from the end of 15 years from
now, if the deposit earns 10% per year a sum of
Rs.5,000 / 0.10 = Rs.50,000
is required at the end of 14 years. The amount that must be deposited to get this
sum is:
Rs.50,000 / FVIF (10%, 14 years) = Rs.50,000 / 3.797 = Rs.13,165
15.
=
=
5.019
4.494
x 3%
= 15.1%
16.
17.
FV5
=
=
=
=
18.
FV5
=
=
=
=
19
12
4 times
24
12 times
24
= 12.6
= 26.2
= 26.8
0.6
2.2
2.8
Investment required at the end of 8th year to yield an income of Rs.12,000 per
year from the end of 9th year (beginning of 10th year) for ever:
Rs.12,000 x PVIFA(12%, )
= Rs.12,000 / 0.12 = Rs.100,000
To have a sum of Rs.100,000 at the end of 8 th year , the amount to be deposited
now is:
Rs.100,000
Rs.100,000
=
= Rs.40,388
PVIF(12%, 8 years)
2.476
21.
The interest rate implicit in the offer of Rs.20,000 after 10 years in lieu of
Rs.5,000 now is:
Rs.5,000 x FVIF (r,10 years) = Rs.20,000
Rs.20,000
FVIF (r,10 years) =
= 4.000
Rs.5,000
22.
FV10
If the inflation rate is 8% per year, the value of Rs.26,530 10 years from now, in
terms of
the current rupees is:
Rs.26,530 x PVIF (8%,10 years)
= Rs.26,530 x 0.463 = Rs.12,283
23.
Rs.50,000
FVIFA(12%, 10 years) x (1.12)
Rs.50,000
= Rs.2544
17.549 x 1.12
24.
The discounted value of Rs.20,000 receivable at the beginning of each year from
2025 to 2029, evaluated as at the beginning of 2024 (or end of 2023) is:
Rs.20,000 x PVIFA (12%, 5 years)
=
Rs.20,000 x 3.605 = Rs.72,100.
The discounted value of Rs.72,100 evaluated at the end of 2020 is
Rs.72,100 x PVIF (12%, 3 years)
=
Rs.72,100 x 0.712 = Rs.51,335
If A is the amount deposited at the end of each year from 2015 to 2020 then
A x FVIFA (12%, 6 years) = Rs.51,335
A x 8.115 = Rs.51,335
A = Rs.51,335 / 8.115
=
Rs.6326
25.
26.
The discounted value of the annuity of Rs.2000 receivable for 30 years, evaluated
as at the end of 9th year is:
Rs.2,000 x PVIFA (10%, 30 years) = Rs.2,000 x 9.427 = Rs.18,854
The present value of Rs.18,854 is:
Rs.18,854 x PVIF (10%, 9 years)
=
Rs.18,854 x 0.424
=
Rs.7,994
30 per cent of the pension amount is
Rs.149,980
Rs.149,980
Rs.149,980
------------ = Rs.82,540
1.817
21.244
18.914
x 1%
= 1.53%
Thus, the bank charges an interest rate of 1.53% per month.
The corresponding effective rate of interest per annum is
[ (1.0153)12 1 ] x 100 = 20%
28.
If A is the annual deposit to be made in the sinking fund for the years 1 to 5,
then
A x FVIFA (8%, 5 years) = Rs.2.21 million
A x 5.867 = Rs.2.21 million
A = 5.867 = Rs.2.21 million
A = Rs.2.21 million / 5.867 = Rs.0.377 million
29.
Let `n be the number of years for which a sum of Rs.20,000 can be withdrawn
annually.
Rs.20,000 x PVIFA (10%, n) = Rs.100,000
PVIFA (10 %, n) = Rs.100,000 / Rs.20,000 = 5.000
From the tables we find that
PVIFA (10%, 7 years) =
PVIFA (10%, 8 years) =
4.868
5.335
5.000 4.868
----------------5.335 4.868
x 1 = 7.3 years
= 500000 / PVIFA(14%,4)
= 500000 / 2.914
= Rs.171,585
Beginning
amount
------------500000
398415
282608
150588
Annual
installment
--------------171585
171585
171585
171585
Interest
----------70000
55778
39565
21082
Principal
Remaining
repaid
balance
------------------------101585
398415
115807282608
132020
150588
150503
85*
Define n as the maturity period of the loan. The value of n can be obtained from
the equation.
200,000 x PVIFA(13%, n)
PVIFA (13%, n)
=
=
1,500,000
7.500
Rs.300 million
Expected present value of the iron ore that can be mined over the next 15 years
assuming a price escalation of 6% per annum in the price per tone of iron
= Rs.300 million x
= Rs.300 million x
33
34.
35.
1 (1 + g)n / (1 + i)n
-----------------------i-g
1 (1.06)15 / (1.16)15
0.16 0.06
(b)
1+g n
1 - ------1+r
PV = A(1+g) ----------------r- g
It may be noted that if g1 is the growth rate in the no. of units and g2 the growth
rate in price per unit, then the growth rate of their product, g = (1+g1)(1+g2) - 1
In this problem the growth rate in the value of oil produced, g = (1- 0.05)(1
+0.03) - 1 = - 0.0215
Present value of the wells production =
1+g n
1 - ------1+r
PV = A(1+g) -----------------
r- g
= (50,000 x 50) x ( 1-0.0215)x 1 (0.9785 / 1.10)15
0.10 + 0.0215
= $ 16,654,633
36.
The growth rate in the value of the oil production g = (1- 0.06)(1 +0.04) - 1
= - 0.0224
Present value of the wells production =
1+g n
1 - ------1+r
PV = A(1+g) ----------------r- g
= (80,000 x 60) x ( 1-0.0224)x 1 (0.9776 / 1.12)20
0.12 + 0.0224
= $ 30,781,328.93
37.
38
Assuming 52 weeks in an year, the effective interest rate is
0.08
1 +
52
Solution:
1. How much money would Ramesh need 15 years from now?
500,000 x PVIFA (10%, 15years)
+ 1,000,000 x PVIF (10%, 15years)
= 500,000 x 7.606 + 1,000,000 x 0.239
= 3,803,000 x 239,000
= Rs.4,042,000
2. How much money should Ramesh save each year for the next 15 years to be able
to meet his investment objective?
Rameshs current capital of Rs.600,000 will grow to :
600,000 (1.10)15 = 600,000 x 4.177 = Rs 2,506,200
This means that his savings in the next 15 years must grow to :
4,042,000 2,506,200 = Rs 1,535,800
So, the annual savings must be :
1,535,800
1,535,800
=
= Rs.48,338
31.772
3. How much money would Ramesh need when he reaches the age of 60 to meet his
donation objective?
200,000 x PVIFA (10% , 3yrs) x PVIF (10%, 11yrs)
= 200,000 x 2.487 x 0.317 = 157,676
4. What is the present value of Rameshs life time earnings?
400,000
46
1
400,000(1.12)
2
1.12
1
1.08
= 400,000
400,000(1.12)14
15
15
0.08 0.12
= Rs.7,254,962
MINICASE--2
Solution: 1)
Re.1 deposit each at the
end of month
0 1
becomes
Rs.3.0402
12
40
Rs.3.0402
44
Rs.3.0402
MBA expenses for year I at present = 20 lakhs. After 10 years it would be = 20(1+0.05) 10 = 32.58
lakhs
MBA expenses for year II at present = 25 lakhs. After 11 years it would be = 25(1+0.05) 11 =
42.76 lakhs
At the end of 3 months, each 1 Rupee deposited in the RD account becomes = FVIFA(0.08/12,3)
= [{(1+0.08/12)3 -1} / (0.08/12)] x (1+0.08/12) = {(1.00667) 3-1}/0.00667 x 1.00667 = Rs.3.0402
which when compounded quarterly becomes at the end of 10 years = 3.0402 x [(1+0.08/4) 4x10 1]/ (0.08/4)
= 3.0402 x [(1.02)40 1] / 0.02 = Rs.
183.634
For a RD maturity value of Rs.183.634 if the deposit to be made is Rs.1, for a maturity value of
Rs.32.58 lakhs, the monthly deposit to be made will be = 32,58,000/183.634 = Rs.17,742
Similarly for a maturity value of Rs.42.76 lakhs the monthly deposit needed .will be
= 42,76,000 / [3.0402 x {(1.02)44 1} / 0.02] = Rs. 20,236
2)
Amount required for Jasleens marriage at the end of 20 years = Rs.300 lakhs
Cumulative fixed deposit to be made now to get the above amount = 300,00,000 / (1+0.08/4) 4x20
= Rs.61,53,292
3)
Year end 0
19 20
What deposit?
12L
Annuity Payments
10
11
12
Annuity Period
13
14 15
16
17
18
Annuity needed per annum at the beginning of each year in real terms after 10 years =
Rs.12 lakhs
With inflation at 5 percent, in nominal terms, this may be considered as a growing
annuity for
10 years at a growth rate of 5 percent and discount rate of 10 percent.
Present value of the annuity , as at the beginning of the 10th year from now
= 12,00,000 x (1+0.05)[ 1 (1+0.05)/(1+0.10)10 /(0.10-0.05)] = Rs.93,74,163
Amount to be deposited in cumulative fixed deposit now, to have a maturity value of
Rs.93,74,163 at the end of 9 years = 93,74,163/(1+0.08/4)4x9 = Rs.45,95,432