Financial Management 2E: Rajiv Srivastava - Dr. Anil Misra Solutions To Numerical Problems
Financial Management 2E: Rajiv Srivastava - Dr. Anil Misra Solutions To Numerical Problems
Financial Management 2E: Rajiv Srivastava - Dr. Anil Misra Solutions To Numerical Problems
Solution:
The interest rate given in the first option is the nominal rate while in the second option since
it is a case of annual compounding the interest offered rate is the effective rate.
To compare the two options the effective interest rate for the first option needs to be
computed.
For the first option:
Nominal interest rate (i) = 0.25 or 25%
Number of compounding periods per year (n) = 12
Effective interest rate (r) = ⎡
⎢1 +
i ⎤
n
− 1
⎣⎢ n ⎥⎦
⎡ . 25 ⎤
12
r= ⎢1 + − 1 r= 0.2807
⎢⎣ 12 ⎥⎦ or 28.07%
No, the borrower is not correct as the effective rate of interest for the first option is
more than that for the second option.
Hence borrowing from Banko @ 27% p.a is a cheaper option than borrowing from
Financier Ltd (in which effective rate is 28.07%).
Solution:
Future Value (FV) = Present Value (PV) x Future Value Interest Factor (FVIF
n
FV = (1+r)
Where;
r = rate or return 13%
n = time period of investment (years) 5
Present Value (PV)= Rs 20.00 lakhs
Future Value (FV) = Rs 36.85 lakhs
5
FINANCIAL MANAGEMENT 2e Solutions to Numerical Problems
Rajiv Srivastava - Dr. Anil Misra Chapter 4
Solution:
(1+ r)n −1
Fut ure V alue Annuit y Fact or FV A(r,n) =
r
Solution:
Scheme A Scheme B
Amount to be invested annually Rs 7,000 Rs 7,000
Time period (years) 8 5
Lumpsum received at the end Rs 75,000 Rs 50,000
Decision can be taken based on the interest rates implied in the offer.
The implied interest rates for the two schemes can be computed as follows:
Scheme A Scheme B
Future Value Interest Factor for Annuity (FVIFA) 75000/7000 50000/7000
= 10.71 7.14
Now looking at the FVIFA table to locate the FVIFA of 10.71 against 8 years we can find
out the rate of return. Return for option A lies between 8 and 9%.
Now looking at the FVIFA table to locate the FVIFA of 7.14 against 5 years we can find
out the rate of return. Return for option B is around 18%.
Hence option B is better than option A.
5
FINANCIAL MANAGEMENT Solutions to Numerical Problems
Rajiv Srivastava - Dr. Anil Misra Chapter 4
Solution:
Since the the options have varied maturity they are incomparable. To make them
comparable we need to find out the present value of all the above options.
a) Since it is available today, this is the present value only i.e. Rs 1,60,000 is the present
value.
n
⎛ 1 ⎞
b) PVIF = ⎜ ⎟ or PVIF at 12%= 0.4039
⎝ 1 + r ⎠
1
c) As it is known, Present Value of a Perpetuity =
r
Present Value Factor for Perpetuity at 12%= 8.3333
Present value of Rs 25,000 in perpetuity = Rs 2,08,333
5
FINANCIAL MANAGEMENT 2e Solutions to Numerical Problems
Rajiv Srivastava - Dr. Anil Misra Chapter 4
Solution:
The problem can be solved in three steps as follows:
n
Step 1 : Finding the PV factor. As it is known that PVIF= ⎛ 1 ⎞
⎜ ⎟
⎝ 1 + r ⎠
Year wise PV factors are given below in Col 3. They have been computed using the
above model.
Step 2: Finding out the Present value. Present Value = Cash flows x PV Factor
Step 3: Finding the Net Present Value (NPV). NPV = PV of Cash Inflows - PV of Cash
outflows.
NPV is shown in the last cell of the Table below:
PV Cash Flows PV Factor PV (Rs)
Col.1 Col.2 Col.3 Col. 4
0 -120,00,000 1 -120,00,000
1 18,00,000 0.8772 15,78,947
2 30,50,850 0.7695 23,47,530
3 42,50,600 0.6750 28,69,034
4 40,50,020 0.5921 23,97,937
5 32,45,450 0.5194 16,85,585
6 30,56,890 0.4556 13,92,678
7 2,45,065 0.3996 97,937
8 1,55,400 0.3506 54,477
9 1,35,600 0.3075 41,698
10 1,25,000 0.2697 33,718
4,99,541
Acceptance of the Project is likely to create value for the business to the tune of 4.99
lakhs approx. hence Shruti Ltd is advised to go ahead with the expansion plans.
5
FINANCIAL MANAGEMENT 2e Solutions to Numerical Problems
Rajiv Srivastava - Dr. Anil Misra Chapter 4
Solution:
Scheme I Scheme II
Interest rate (per annum) 8.00% ?
Time period (years) 11 11
Assuming that the interest rate inherent in the second scheme is 'r'
(1+ r)n − 1
Future Value Annuity Factor FVA(r, n) =
r
1.0815 − 1
=
0.08
= 27.1521
2,000
= 67,880 .25
r
gives r = 2.95%
Solution:
1
⎡ EndingV alue ⎤ n
CAGR = ⎢BeginningV alue⎥ − 1
⎣ ⎦
CAGR = 10.22%