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0 i% 10
Cash Flow Diagram
(a) Borrowers viewpoint
Loan in Rs
+ 1 2 3
time
- 0 10
Payment (expenditures)
Rs Rs Rs
+
0 time
- i% 10
Loan in Rs
Types of Compound Interest Formulas
2. Determine the amount P that you should deposit into an account 2 years from
now, in order to be able to withdraw Rs. 4000/- per year for 5 years starting 3
years from now, at an interest rate of 15% per year ?
3. A company is planning to make two equal deposits such that 10 years from
now the company will have $ 49000 to replace a small machine. If the first
deposit is to be made 1 year from now and the second is to be made 9 years
from now, how much must be deposited each time if the interest rate is 15%
per annum ?
Solved Problems
4. Determine the future amount of Rs. 100/- payment deposited at the end of
each of the next five years and earning 6% per annum.
5. It is desired to accumulate Rs. 563.70 by making a series of 5 equal annual
payments at 6% interest compounded annually. What is the required amount of
each payment?
6. Rs. 1000/- invested now at 5% interest compounded annually, provide for 8
equal future year end payments. Determine A.
7. A professor working in MSRIT has 10 years of service before he retires. He
now plans to deposit Rs. 25000 at the end of first year and there after an annual
increase of Rs. 500 for the remaining nine years. If he can expect a return of
10% find the future amount at the end of the 10th year.
Solved Problems
8. Arun buys a car, making an initial payment of Rs. 1,00,000/- and taking a loan
of Rs. 1,50,000 from ICFC Bank. He makes equal monthly repayments of
Rs.8000 to ICFC Bank, to clear the loan in full for a period of 2 years. After
making the last payment, he sells the car for Rs. 1,50,000. Draw two CFDs
one for Arun and one for ICFC Bank for the above cash flow.
Solved Problems
1. If Mr. X deposits Rs.1000 in his bank account at 6% compounded interest on
January 1, 2001. How much money will be accumulated on January 1, 2011 ?
Ans: Method 1: Single payment compounded amount
P = Rs.1000 ; i =6 ; n=10 ; F= ? ;
Formula: F= P(F/P, i, n) = 1000 * (F/P,6,10)
= 1000 * (1.791) = Rs 1791/-
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
1000
Solved Problems
2. Determine the amount P that you should deposit into an account 2 years from
now, in order to be able to withdraw Rs. 4000/- per year for 5 years starting 3
years from now, at an interest rate of 15% per year ?
Ans: Method 5: Equal payment series present worth
P = ? ; i = 15% ; n=5 ; A= 4000 ;
Formula: P= A(P/A, i, n) = 4000 * (P/A, 15, 5)
= 4000 * (3.3522) = Rs 13408.80/-
i= 15% n=5 years
4000 4000 4000 4000 4000
0
0 1 2 3 4 5 6 7 8
P
Solved Problems
3. A company is planning to make two equal deposits such that 10 years from now
the company will have $ 49000 to replace a small machine. If the first deposit
is to be made 1 year from now and the second is to be made 9 years from now,
how much must be deposited each time if the interest rate is 15% per annum ?
Ans: Method 1: Single payment compounded amount
P = P1+P2 ; i = 15% ; F= $ 49000
Formula: F= P(F/P, i, n) = P1 (F/P, i,n) + P2(F/P, i, n)
= P1 (F/P, 15,9) + P2(F/P, 15, 1)
= P (3.518) + P (1.15) => 49000 = 4.668 P => P = $ 10497 /-
i= F = 49000
15%
0
0 1 2 3 4 5 6 7 8 9 10
P1 P2
Solved Problems
4. Determine the future amount of Rs. 100/- payment deposited at the end of each
of the next five years and earning 6% per annum
Ans: Method 3: Equal payment series compounded amount
A = 100 ; i = 6% ; n=5 ; F= ?
Formula: F= A(F/A, i, n) = 100 (F/A , 6, 5)
= 100 (5.637) = Rs. 564/-
i= 6% F=?
0
0 1 2 3 4 5
i= 6% F = 563.70
0
0 1 2 3 4 5
A= ? A=? A= ? A= ? A= ?
Solved Problems
6. Rs. 1000/- invested now at 5% interest compounded annually, provide for 8
equal future year end payments. Determine A
Ans: Method 6: Equal payment series capital recovery amount
P = 1000; i = 5% ; n=8 ; A= ?
Formula: A= P(A/P, i, n) = 1000 (A/P , 5 , 8)
= 1000 (0.1547) = Rs. 154.72/-
P = 1000 i= 5%
0
0 1 2 3 4 5 6 7 8
A= ? A=? A= ? A= ? A= ?
Solved Problems
7. A professor working in MSRIT has 10 years of service before he retires. He
now plans to deposit Rs. 25000 at the end of first year and there after an annual
increase of Rs. 500 for the remaining nine years. If he can expect a return of
10% find the future amount at the end of the 10th year.
Ans: Method 7 & Method 3
A1= Rs.25000 ; G =Rs. 500; i = 10% ; n=10 yrs ; A= ? ; F= ?
i) Formula: A= A1+G(A/G, i, n) = 25000+ 500(A/G , 10 , 10)
A= 25000+500(3.72546) = Rs. 26862.73/-
ii) Formula: F=A(F/A, i, n) = A(F/A, 10, 10) = 26862.73 (15.93742)
= Rs. 4,28,122.61/-
Solved Problems
8. Arun buys a car, making an initial payment of Rs. 1,00,000/- and taking a loan
of Rs. 1,50,000 from ICFC Bank. He makes equal monthly repayments of
Rs.8000 to ICFC Bank, to clear the loan in full for a period of 2 years. After
making the last payment, he sells the car for Rs. 1,50,000. Draw two CFDs
one for Arun and one for ICFC Bank for the above cash flow.
Ans: CFD for Arun
Rs. 1,50,000 /-
Rs. 1,50,000 /-
1 2 3 4 5 6 23 24
0
months
Rs 8000/-
Rs. 1,00,000
Recap