Explain Economic Equivalence.

[8]

Given the following two offers that are at hand,

i) Two payments of Rs. 20,000 now with i = 9%, and Rs.

50,000 at the end of l0 years.

i) l0 equal
annual payments of Rs. 8,000 each.

Using Cash-Flow diagrams depict and explain the economical equivalence

of the two offers. Are they same, if yes, how, if they are not similar, which
offer is better and why?

Explain Present worth and Future worth. [8]

For a company the incoming cash flows are as follows,

Start-up capital — l00 Lakhs, year one 80 Lakhs, year two l20 Lakhs, year
three l50 Lakhs, year four 200 Lakhs, year five l00 Lakhs.

Compute the equivalent worth at year three if the annual interest rate is at
l0%.

Year l: Rs. 25,000 to purchase a computer,

Year 2: Rs. 3,000 to purchase additional hardware,

Year 3: No expenses,

Year 4: Rs. 5,000 to purchase software upgrades.

How much money must be deposited now-in order to cover the anticipated
payments over the next four years? [8]

Suppose you deposit Rs. 5,000 in a banks savings account at the end of each
year for the next 5 years, The back pays interest at a rate of 6% per year.
Assume that you don’t withdraw the interest earned. How much can be
withdrawn at the end of five years? Depict the necessary cash flow
diagram. Show ending balances after each year in a proper tabulated
manner.
[10]
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b) Explain the terms,, simple interest or compound interest with correct equations.

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Suppose you deposit Rs. 1,000 in a banks savings account that pays interest at a
rate of 8%’per year. Assume that you don’t withdraw the interest earned at the end
of each period (year), but instead let it accumulate for 3 years. Depict all the

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returns calculations based on (i) simple interest and (ii) compound interest? [8]

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b) Assume you borrowed Rs. 21,000 to finance your educational expenses for your

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remaining year of college. The loan has to be paid off over five years. The loan

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carries an interest rate of 6% per year and is to be repaid in equal annual

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installments over the next five years. Assume that the money was borrowed at the

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beginning of the year and that the first installment will be due a year later.

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Compute the amount of the annual repayment installments. Depict all the

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necessary cash-flows correctly. [8]

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Q9) a) Explain various financial statements with their needs. [8]
b) What is the importance of having cash-flow statements? What points do they depict.

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Q10)a) Explain various patterns of cash-flows with correct examples. What are Positive

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and Negative cash flows. [8]
b) What is Depreciation. [10]

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A company ABC Ltd. purchased a machine costing Rs. 1000 on 1st January
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2001. It had a useful life of three years over which it generated
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annual sales of Rs. 800. ABC Ltd’s annual costs during the three years were Rs.

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300. Its income statement at the end of the three years looks as follows,
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Income Statement 2001 2002 2003

Sales 800 800 800
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Cost of Sales (300) (300) (300)

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Fixed Asset Cost (1000) - -
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Net Profit (Loss) (500) 500 500

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Instead of charging the entire cost of fixed asset at once, if ABC Ltd. depreciates
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the capital expenditure over its useful life, depict the corresponding Income
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Statement and Balance Sheet at the end of the three years.

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