FINANCIAL MANAGEMENT-1

Topic: TIME VALUE OF MONEY

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PROBLEMS:
1. Calculate the value 10 years hence of a deposit of Rs.20,000 made today if the
interest rate is (a) 4 percent

(b) 6 percent

(c) 8 percent

(d) 9 percent.

2. Calculate the value 3 years hence of a deposit of Rs.5,800 made today if the interest
rate is
(a) 12 percent

(b) 14 percent

(c) 15 percent

(d) 16 percent.

3. You can save Rs.5,000 a year for 3 years, and Rs.7,000 a year for 7 years thereafter.
What will these savings cumulate to at the end of 10 years, if the rate of interest is 8
percent?
4. Krishna saves Rs.24,000 a year for 5 years, and Rs.30,000 a year for 15 years
thereafter. If the rate of interest is 9 percent compounded annually, what will be the
value of his savings at the end of 20 years?
5. You plan to go abroad for higher studies after working for the next five years and
understand that an amount of Rs.2,000,000 will be needed for this purpose at that
time. You have decided to accumulate this amount by investing a fixed amount at
the end of each year in a safe scheme offering a rate of interest at 10 percent. What
amount should you invest every year to achieve the target amount?
6. How much should Vijay save each year, if he wishes to purchase a flat expected to
cost Rs.80 lacs after 8 years, if the investment option available to him offers a rate
of interest at 9 percent? Assume that the investment is to be made in equal amounts
at the end of each year.
7. At the time of his retirement, Rahul is given a choice between two alternatives: (a)
an annual pension of Rs120,000 as long as he lives, and (b) a lump sum amount of
Rs.1,000,000. If Rahul expects to live for 20 years and the interest rate is expected

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to be 10 percent throughout , which option appears more attractive
8. A leading bank has chosen you as the winner of its quiz competition and asked you
to choose from one of the following alternatives for the prize: (a) Rs. 60,000 in cash
immediately or (b) an annual payment of Rs. 10,000 for the next 10 years. If the
interest rate you can look forward to for a safe investment is 9 percent, which
option would you choose?
9. What is the present value of an income stream which provides Rs.30,000 at the end
of year one, Rs.50,000 at the end of year three , and Rs.100,000 during each of the
years 4 through 10, if the discount rate is 9 percent ?
10. What is the present value of an income stream which provides Rs.25,000 at the end
of year one, Rs.30,000 at the end of years two and three , and Rs.40,000 during
each of the years 4 through 8 if the discount rate is 15 percent ?
11. Suppose you deposit Rs.200,000 with an investment company which pays 12
percent interest with compounding done once in every two months, how much will
this deposit grow to in 10 years?
[Note- The general formula for the future value of single cash flow after n year when
compounding is done m times a year is: FVN =PV[1+r/m]mn ] or [Calculate rate by [Using
Effective Interest Rate=[1+Stated annual interest rate/m]m 1 ] ]
12. A bank pays interest at 5 percent on US dollar deposits, compounded once in every
six months. What will be the maturity value of a deposit of US dollars 15,000 for
three years?
[Note- The general formula for the future value of single cash flow after n year when
compounding is done m times a year is: FVN =PV[1+r/m]mn ] or [Calculate rate by [Using
Effective Interest Rate=[1+Stated annual interest rate/m]m 1 ] ]
13. Ravikiran deposits Rs.500,000 in a bank now. The interest rate is 9 percent and
compounding is done quarterly. What will the deposit grow to after 5 years? If the
inflation rate is 3 percent per year, what will be the value of the deposit after 5 years
in terms of the current rupee? ?

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[Note- The general formula for the future value of single cash flow after n year when
compounding is done m times a year is: FVN =PV[1+r/m]mn ] or [Calculate rate by [Using
Effective Interest Rate=[1+Stated annual interest rate/m]m 1 ] ]
14. You require Rs.250 ,000 at the beginning of each year from 2010 to 2012. How
much should you deposit( in equal amounts) at the beginning of each year in 2007
and 2008 ? The interest rate is 8 percent.
15. If you deposit Rs.2,000 today at 6 percent rate of interest in how many years
(roughly) will this amount grow to Rs.32,000 ? Work this problem using the rule of
72do not use tables.
16. If you deposit Rs.3,000 today at 8 percent rate of interest in how many years
(roughly) will this amount grow to Rs.1,92,000 ? Work this problem using the rule
of 72do not use tables.
17. A finance company offers to give Rs.20,000 after 14 years in return for Rs.5,000
deposited today. Using the rule of 69, figure out the approximate interest rate
offered.
18. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an
account that pays an annual interest rate of 14%?
19. What will $247,000 grow to be in 9 years if it is invested today in an account with an
annual interest rate of 11%?
20. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an
account with an annual interest rate of 8%?
21. At what annual interest rate must $137,000 be invested so that it will grow to be
$475,000 in 14 years?
22. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an
account that pays a quoted annual interest rate of 13% with semi-annual compounding of
interest?[Using Effective Interest Rate=[1+Stated annual interest rate/m]m 1 ]
23. What will $153,000 grow to be in 13 years if it is invested today in an account with a
quoted annual interest rate of 10% with monthly compounding of interest?

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24. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an
account with a quoted annual interest rate of 8% with monthly compounding of interest?
25. At what quoted annual interest rate must $134,000 be invested so that it will grow to be
$459,000 in 15 years if interest is compounded weekly?
26. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of interest. What is your effective annual interest rate? [Using Effective
Interest Rate=[1+Stated annual interest rate/m]m 1 ]
27. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment
will occur one year from today). If you feel that the appropriate discount rate is 13%, what is
the annuity worth to you today?
28. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each
year) in an account that pays an annual interest rate of 14%, what will your account be
worth at the end of 12 years?
29. You plan to borrow $389,000 now and repay it in 25 equal annual installments
(payments will be made at the end of each year). If the annual interest rate is 14%, how
much will your annual payments be?
30. You are told that if you invest $11,000 per year for 23 years (all payments made at the
end of each year) you will have accumulated $366,000 at the end of the period. What
annual rate of return is the investment offering?
31. You are offered an annuity that will pay $17,000 per year for 7 years (the first payment
will be made today). If you feel that the appropriate discount rate is 11%, what is the
annuity worth to you today?
32. If you deposit $15,000 per year for 9 years (each deposit is made at the beginning of
each year) in an account that pays an annual interest rate of 8%, what will your account be
worth at the end of 9 years?
33. You plan to accumulate $450,000 over a period of 12 years by making equal annual
deposits in an account that pays an annual interest rate of 9% (assume all payments will

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occur at the beginning of each year). What amount must you deposit each year to reach
your goal? 105
34. You are told that if you invest $11,100 per year for 19 years (all payments made at the
beginning of each year) you will have accumulated $375,000 at the end of the period. What
annual rate of return is the investment offering?
35. You have a chance to buy an annuity that pays $1,000 at the end of each year for 5
years. You could earn 6% on your money in other investments with equal risk. What isthe
most you should pay for the annuity?
36. Maggie deposits $10,000 today and is promised a return of $17,000 in eight years. What
is the implied annual rate of return?
37. Jan plans to invest an equal amount of $2,000 in an equity fund every year-end
beginning this year. The expected annual return on the fund is 15 percent. She plans to
invest for 20 years. How much could she expect to have at the end of 20 years?

38. A security is currently selling for $8,000 and promises to pay $1,000 annually for the
next 9 years, and $1,500 annually in the 3 years thereafter with all payments occurring at
the end of each year. If your required rate of return is 7% p.a., should you buy this security?

a. Yes, because the return is greater than 7%

b. No, because the return is less than 7%
c. Yes, because the return is 7%
d. Yes, because the present value at 7% is less than $8,000.
e. There is insufficient information provided to answer this question.

39. A given rate is quoted as 12% APR, but has an effective annual rate (EAR) of 12.55%.
What is the frequency of compounding during the year?

a. Annually
b. Semi-annually

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c. Quarterly
d. Monthly
e. Daily

40. You are offered the choice between receiving two annuities. Each pays $200 per year
for 4 years (assume both are equally risky). The first is an annuity due. The second is a
regular annuity. If you are a rational investor, which would you chose (assume that interest
rates are greater than zero)?
a) The ordinary annuity.
b) The annuity due.
c) Either one, because as the problem is set up, they have the same present value.
d) Without information on the interest rate, we do not have enough information to decide.
e) The annuity due; however, if the payments on both annuities were doubled to $400 per
year, the ordinary annuity would be preferable.
41. As the interest rate increases, the difference in the present value of an annuity due
versus an ordinary annuity (assuming payments and number of periods are the same)
a. Increases
b. Decreases
c. Not enough information to tell
d. Stays the same
e. Depends on the relationship between the present value and the future value of the
annuity due.
42. The number of years it would take $100 to double, assuming an annual stated rate of 6
percent, would be least under which compounding assumption?
a. Annual
b. Continuous
c. Semi-annual
d. Monthly
e. Quarterly

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43. You are analyzing a potential investment. The investment is structured as follows: you
pay a lump sum up front, and receive a series of payments of equal amounts in the future.
Which of the following would make the investment more appealing. Assume that your
discount rate is greater than zero and assume that in each case (a, b, c, and d), only the
factors mentioned change, but that all else remains constant.
a. The discount rate increases but the payment pattern remains unchanged.
b. The total amount of the cash flows you receive remains the same, but the cash flows are
paid out over a longer time period.
c. The discount rate decreases, but the cost of the investment (the payment up front at t=0)
remains unchanged.
d. Answers a and b above are both correct.
e. None of the above are correct

44. Time value of money indicates that

a) A unit of money obtained today is worth more than a unit of money obtained in future
b) A unit of money obtained today is worth less than a unit of money obtained in future
c) There is no difference in the value of money obtained today and tomorrow
d) None of the above
45. Time value of money supports the comparison of cash flows recorded at different time
period by
a) Discounting all cash flows to a common point of time
b) Compounding all cash flows to a common point of time
c) Using either a or b
d) None of the above.

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ANSWERS:
1. a-29600,

b-35820,

c-43180,

d-47340

2. a-8149,

b-8596,

c-8822,

d-9054

3. 90281
4. 1404006
5. 327600
6. 725426
7. 1021680
8. 64180
9. 454658
10. 152395
11. 656200
12. 17395.50
13. 780255, 673360
14. 286792
15. 48yr
16. 54yr
17. 10.38
18. $25489.71
19. $631835.12
20. 16.06yr
21. 9.29%
22. $104947.03
23. $558386.38
24. 12.97yr
25. 8.21%
26. 13.65%
27. $136486.59
28. $436331.98

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29. $56598.88
30. 3.21%
31. $88919.14
32. $202298.44
33. $20497.98
34. 5.48%
35. $4212.36
36. 6.86%
37. $204887
38. A
39. C
40. B
41. A (is a variation on rate up, implied price down)
42. B (for a given nominal rate more frequent compounding implies a higher effective rate)
43. C
44. A
45. C

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