Chap.

5 Time Value of Money 97

Chapter
Time Value of Money

Concept 1- Concept of Interest & Time Value of Money

Interest is the remuneration paid by the borrowers of money to the lenders. The excess money paid to
the Lender of Funds is called Interest.
Example: If Rs. 1,00,000 is borrowed for a year, the amount of repayment would be in excess of the
amount so borrowed. If say Rs. 1,10,000 is paid back Rs. 10,000 constitutes interest.
Time Value of Money means that the value of a unit of money is different in different time periods. The
sum of money received in future is less valuable than it is today. In other words, the present worth of
Rupees received after some time will be less than a Rupee received today. Since a Rupee received
today has more value, rational investors would prefer Current Receipts to Future Receipts. If they
postpone their receipts, they charge some interest.

Concept 2- Basic Terms Used in Chapter

PRINCIPAL (P): The money originally lent or borrowed is called principal.
RATE OF INTEREST (R): It is the rate at which interest is charged for a definite period of time for use
of principal, generally on a yearly basis. It is usually expressed as percentages.
For e.g. If rate of interest is 5% p.a it means that Rs. 5 is the interest on Rs. 100 for one year.
TIME (T): It is the number of years for which the principal is borrowed or loaned.

Concept 3- Simple Interest

Simple Interest is the interest calculated as a simple percentage of the original principal amount. The
formula relating to Simple Interest are given below –
Concept Capsule -1
Let us say that Rs. 50,000 is invested at Simple Interest of 10% p.a. for 3 years. The amount at the
end of 3 years as per the formula = 50,000 [1+ (0.10 × 3)] = 50,000 × 1.3 = Rs. 65,000.
Year Opening Principal Interest Total Interest Amount

1 50,000 =50,000×10%=5,000 5,000 55,000

2 50,000 =50,000×10%=5,000 10,000 60,000

3 50,000 =50,000×10%=5,000 15,000 65,000

HOW TO FIND TIME OR RATE TO MULTIPLY A SUM AT S.I.

SUM IS
PARTICULARS
1.5 TIMES DOUBLED TREBLED 4 TIMES

0.5 1 2 3
Time reqd.(yrs) 𝑇= 𝑦𝑟𝑠. 𝑇= 𝑦𝑟𝑠. 𝑇= 𝑦𝑟𝑠. 𝑇= 𝑦𝑟𝑠.
𝑅 𝑅 𝑅 𝑅
0.5 1 2 3
Rate reqd. 𝑅= 𝑦𝑟𝑠. 𝑅= 𝑅= 𝑅=
𝑇 𝑇 𝑇 𝑇
Chap. 5 Time Value of Money 98

Concept Capsule -2

What time will be required for a sum of money to double itself at 10% pa. simple interest?

Solution:
If P is the principal, then amount is 2P.
10
∴ SI = 2P – P = P, R = , T =?
100
10
SI = PRT ⇒ P = P × ×T
100
100
⇒T= = 10 years
10

Concept Capsule -3

At what rate percent per annum will a sum of money treble itself in 20 years.

Solution:
If P is the principal, then amount is 3P.
∴ SI = 3P – P = 2P.
SI = PRT ⇒ 2P = P × R × 20
2 1
⇒R= = or R = 10% p.a.
20 10

Concept Capsule -4

What sum will discharge a debt of Rs 5625 due after 2 years and six months at 5% p.a. Simple
interest to day.

Solution:
5
Let P be the principal. Amount + 5625, R =
100
5
T = time = years.
2

Amount = P + SI = P + PRT
5 5
5625 = P(1 + RT) = 𝑃 (1 + × )
100 2
9
⇒ 5625 = 𝑃
8
5625×8
⇒P= = 625 × 8 = 5000Rs
9

Concept 4- Compound Interest

Compounding means that interest is paid both on previous earned interest and as well as on the
Principal. Interest due at the end of every payment period is added to the Principal, and Interest on the
next payment period is computed on the new Principal.

Some Conversion Periods are

Conversion Period 1 day 1 month 3 months 6 months 12 months

Compounded Daily Monthly Quarterly Half-yearly Annually

Chap. 5 Time Value of Money 99

CALCULATOR TRICK TO FIND COMPOUND INTEREST

COMPONDIND PERIOD TRICK

ANNUALY R÷100 + 1 × P =,=,=,=……….= A

press = button “n” times where n is equal to no of years.
HALF YEARLY R÷200 + 1 × P =,=,=,=……….= A
press = button “n” times where n is equal to no of Half years.
QUARTERLY R÷400 + 1 × P =,=,=,=……….= A
press = button “n” times where n is equal to no of Quarters.
MONTHLY R÷1200 + 1 × P =,=,=,=……….= A
press = button “n” times where n is equal to no of Months.

Concept Capsule -5
Rs. 4000 is invested at annual rate of interest of 10%. What is the amount after 2 years if the
compounding is done
COMPUTE C. I TRICK AMOUNT

10÷100 + 1 × 4000 =, =, =, =………. = A

ANNUALY press = button “2” times where n is equal to no of 4840
years.

10÷200 + 1 × 4000 =,=,=,=……….= A

HALF YEARLY press = button “4” times where n is equal to no of 4862
Half years. (4 Half years in 2 complete years)

10÷400 + 1 × 4000 =,=,=,=……….= A

QUARTERLY press = button “8” times where n is equal to no of 4881.16
Quarters. (8 Quarters in 2 complete years)

10÷1200 + 1 × 4000 =,=,=,=……….= A

MONTHLY press = button “24” times where n is equal to no of 4885.40
Months. (24 Months in 2 complete years)

Tutorial Note :

• If nothing is mentioned in the problem, the interest period is taken as 1 year.

• S. I. and C. I. are equal for the first conversion period on the same sum at the same rate.
• If rate of interest is same then C. I increase with increase in frequency of compounding.
• Amount at C.I. (P, A1, A2…) forms a G.P. where r = (1 + i). Also true for equal intervals.
• C.I. for each period also forms a G.P. where r = (1 + i) [CI(2nd)- CI(1st) = SI on Cl(1st)]
2[𝐶𝑙(2) −𝑆𝑙(2) ]
• For annual compounding: Cl (2) – Sl(2) = PR2; (R + 3): R =
𝑆𝑙(2)

• C.I. formula can be used in case of uniform periodical increase at fixed rate like population growth.
In case of uniform decrease like depreciation (W.D.V. basic) only is replaced by – i.
• If rate differs from period to period, then 𝐴𝑛 = 𝑝[1 + 𝑖1 ] × [1 + 𝑖2 ] × … × [1 + 𝑖𝑛 ]
Chap. 5 Time Value of Money 100

YEARS REQUIRED FOR A SUM TO DOUBLE AT C. C. I. WITH ANNUAL COMPOUNDING

Thumb Rule R=10% R=11% R=12% R=13% R=14%

𝟎. 𝟔𝟗
𝑻 = 𝟎. 𝟑𝟓 + 7..25 yrs. 6.62 yrs. 6.1 yrs. 5.65 yrs. 5.27 yrs.
𝑹

FOR SHORT PERIODS WITH ANNULA COMPOUNDING

Constant interest rates P + R% + R%.................................+ R% A3

Differing interest rates P + R1% + R2% + R3% + ……………Rn% is An

Tutorial Note :

If the question demands any other value like (Principal, Rate, Time) then Students shall proceed
from Option to Question, the option which satisfy the question will be right option.
Concept Capsule -6
On what sum will the compound interest at 5% per TRICK
annum for two years compounded annually be Rs. (a) 12,000 (b) 16,000
1,640? (c) 15,000 (d) None
Solution:
n = 2 ; i = 0.05 Try Option (b) In Trick
C.I. =P[(1 + i)n - 1] 5÷100 + 1 × 16,000 = … = 1,7640 (A)
1640 = P [(1 + 0.05)2 - 1] press = button “2” times where n is equal to
1640 =P (1.1025- 1) no of years
P = 1,640 / 0.1025= 16,000 Amount – Principal = Interest
Rs. 16,000 is to be invested to earn Interest of Rs. 1,7640-16,000 = 1640
1,640, in 2 years’ time at 5% Compounded
Annually.

Concept Capsule -7
What annual rate of interest compounded annually TRICK
doubles an investment in 7 years? Given that 21/7 = (a) 15 % (b) 10.409 %
1.104090 (c) 9 % (d) None
Solution:
If the Principal be P then A = 2P. Try Option (b) In Trick
A = P(1 + i)n 10.÷100 + 1 × 100 = … = 200 (A)
2P = P (1 + i)7 = 2 = (1 + i)7 press = button “2” times where n is equal to
Taking the 7th Root Both Sides, no of years
21/7 = (1 + i) Since Nothing is Mentioned n question,
1.104090 = 1 + i we can Assume P = 100 & accordingly
I = 0.10409 expect A=200
I % =10.409 %
Chap. 5 Time Value of Money 101

Concept Capsule -8
In what time Rs 5000 amount to Rs 7000 at 8% p.a. compounded quarterly?
Solution:
Here P = 5000, A = 7000
0.08
i= = 0.02
4

A = P(1 + i)n ⇒ 7000 = 5000 (1 + 0.02)n

7
⇒ = (1.02)n
5

⇒1.4 = (1.02)n ⇒ n = 17.

∴ Time period is 17 quarters i.e 4 years 3 months.

Concept Capsule -9
When will Rs. 8,000 amounts to Rs. 8,820 at 10% per annum interest compounded half-yearly?
Solution:
m = 2, I = i/m = i/2 = .10/2 = 0.05, N =mn = 2n
Principal (P)= Rs. 8,000
Amount (A)= Rs. 8,820
We know A= P (1+ I)N
8,820 = 8,000 (1+0.05)N
8820
= (1.05)N
8000

1.1025 = (1.05)N
(1.05)2 = (1.05)N
N=2
N = 2 = 2n, n = 1,
∴ Number of Years = 1.

Concept 5-Effective Rate of Interest

Nominal Rate: The Annual Compound Interest Rate is called the Nominal Interest Rate.

Effective Rate: When the amount is compounded more than once a year, the actual rate of interest for
each year is called the Effective Interest Rate. Effective Rate arises only when there is more than one
compounding terms per annum. Effective Interest Rate is computed as E = (1 + i) m-1, where m is
number of compounding terms per annum. Where Compounding is done more than once during an
annum, the Effective Rate > Nominal Rate.

Formula:
Actual Interest Paid During the Year Closing Amount − Opening Principal
(a) Effective Interest RATE= =
Opening Principal of the Year Opening Principal of the Year

(b) If interest is paid "k" times in a year, & "i" is the rate of interest per annum,
i
Effective Rate of Interest (E) is given by E =(1 + ) k − 1
k
Chap. 5 Time Value of Money 102

CALCULATOR TRICK TO FIND EFFECTIVE RATE

COMPONDIND PERIOD TRICK

ANNUALY R÷100 + 1 × 100 =, -100 = ER

press = button “1” times
HALF YEARLY R÷200 + 1 × 100 =, = -100 = ER
press = button “2” times where n is equal to no of Half years.
QUARTERLY R÷400 + 1 × 100 =, -100 = ER
press = button “4” times
MONTHLY R÷1200 + 1 × 100 =, =, =, =………. = 100 = ER
press = button “12” times where n is equal to no of Months.

Concept Capsule -10

Rs. 5,000 is invested in a Term Deposit Scheme that TRICK
fetches interest 6% per annum compounded 6÷400 + 1 × 100 =, -100 = 6.13 %
quarterly. What will be the interest after one year? press = button “4” times
What is effective rate of interest?
Solution:
We may arrive at the same result by using
E = (1 + i)n - 1
= E = (1 + 0.015)4 – 1
= 1.0613 – 1
= .0613 or 6.13%.

Concept Capsule -11

Find the amount of compound interest and effective TRICK
8÷200 + 1 × 100 =, -100 = 8.16%
rate of interest if an amount of Rs. 20,000 is
press = button “2” times
deposited in a bank for one year at the rate of 8% per
annum compounded semiannually.
Solution
E = (1 + i)n – 1
= (1 + 0.04)2 – 1
= 0.0816 or 8.16%
.

Concept 6- Depreciation
𝑹
The depreciation value (𝑉𝑛 ) by reducing balance method @ R % p.a is given by: 𝑽𝒏 = 𝑽(𝟏 − )𝒏
𝟏𝟎𝟎

CALCULATOR TRICK TO FIND DEPRECIATION

Reducing Balance 1 - R% × Vale of Asset = Scrap Value

Press = Button No Of times after which we need to find

Scrap
Chap. 5 Time Value of Money 103

Concept Capsule -12

If the value of a car gets depreciated by 20% per year, what would be its estimated value at the end
of 5 years, its present value being Rs 24,000?
Solution:
The depreciated value after 5 years
20 5
= 24000(1 − )
100

80 5
= 24000( )
100

4 5
= 24000( )
5

= 24000 × (0.8)5
= 24000 × 0.32768 = Rs 7864.32

Concept 7- Annuity

Meaning: An Annuity is a stream or sequence of regular periodic Cash Flows (either payments made
or received) for a specified period of time. Some examples of Annuity Payments are - (a) Recurring
Deposit Instalments paid to a Bank, (b) Life Insurance Premium per annum, (c) Sinking Fund
Instalments, etc.

Annuity Regular vs Annuity Immediate:

Annuity Regular Annuity Immediate

Regular Payments or Receipts are made at the Payments or Receipts is made at the beginning of
end of each year / period. each year / period.

First Payment or Receipt arises at the end of First Payment or Receipt arises immediately, i.e. in
Year 1. Year 0.

Concept 8-Present Value and Discounting

Present Value We can say present value is today's value of tomorrow's money discounted at the
interest rate. Future value and present value are related to each other in fact they are the reciprocal of
each other.

EXAMPLE: Rs. 1070 was to be received at the end of Year 1 after considering interest at 7% p.a.
Therefore, the Present Value or the Value now of the Rs. 1,070 to be received after 1 year is Rs. 1,000.

From the formula of Amount under Compound Interest, we know that An= P (1 + R) n
Transposing the above formula & solving for P, we have P = An (1 + R) -n.

Discounting future money to the present date involves finding out Present Value of future money.
Discounting is the opposite of Compounding and hence, Present Value of Future Cash Flows is given
by the following formula –
FV1 FV2 FV3 FV4 FVn
Present Value = + + + + ⋯ … … … ..
(1+R)1 (1+R)2 (1+R)3 (1+R)4 (1+R)n
Chap. 5 Time Value of Money 104

Present Value of an Annuity Regular:

PV of an Annuity means the Value of the Annuity at present. It represents the expected Future Cash
Flows, at a given rate of interest. Consider the Annuity as under -

Year end Payments/Receipts (Rs.) Present Value

1 5000 = 5000 ÷ (1.1)1 = 4545

2 5000 = 5000 ÷ (1.1)2 = 4132

3 5000 = 5000 ÷ (1.1)3 = 3757

4 5000 = 5000 ÷ (1.1)4 = 3415

5 5000 = 5000 ÷ (1.1)5 = 3105

Present Value of Annuity Cash Flow Rs. 18,954

Formula

Present Value of a Single Cash Flow Present Value of an Annuity Regular

𝐀𝐧 [(𝟏 +𝑹)𝒏 − 𝟏]
PV= (𝟏 PV= CF ×
+ 𝐑)𝐧 𝑹 (𝟏 +𝑹)𝒏

Where n = number of years for which the money is invested

R = rate of return on the investment.

CALCULATOR TRICK TO COMPUTE PRESENT VALUE

Annuity Regular

Annuity is Given & Present Value Asked

COMPONDIND PERIOD TRICK

R÷100 + 1 ÷ =, =, =, =…………. = GT × Annuity = PV

ANNUALY
press = button “n” times where n is equal to no of years.

R÷200 + 1 ÷ =, =, =, =…………. = GT × Annuity = PV

HALF YEARLY
press = button “n” times where n is equal to no of Half years.

R÷400 + 1 ÷ =, =, =, =…………. = GT × Annuity = PV

QUARTERLY
press = button “n” times where n is equal to no of Quarters.

R÷1200 + 1 ÷ =, =, =, =…………. = GT × Annuity = PV

MONTHLY
press = button “n” times where n is equal to no of Months.
Chap. 5 Time Value of Money 105

Annuity is Given & Present Value Asked

R÷100 + 1 ÷ =, =… = GT (𝑴+ ) → PV ÷ MRC = Annuity

ANNUALY
press = button “n” times where n is equal to no of years.

R÷200 + 1 ÷ =, =… = GT (𝑴+ ) → PV ÷ MRC = Annuity

HALF YEARLY
press = button “n” times where n is equal to no of years

R÷400 + 1 ÷ =, =… = GT (𝑴+ ) → PV ÷ MRC = Annuity

QUARTERLY
press = button “n” times where n is equal to no of years

R÷1200 + 1 ÷ =, =… = GT (𝑴+ ) → PV ÷ MRC = Annuity

MONTHLY
press = button “n” times where n is equal to no of years

Concept Capsule -13

Rs. 5,000 is paid every year for ten years to pay TRICK
off a loan. What is the loan amount if interest rate
be 14% per annum compounded annually? 14÷100+ 1 ÷ =... = GT × 5000 = 26080.55
Solution: press = button “10” times where n is equal to no
V = A.P. (n, i) of years.
Here A = Rs. 5,000
n = 10
i = 0.14
V = 5000 × P (10, 0.14)
= 5000 × 5.21611 = Rs. 26,080.55
Therefore, the loan amount is Rs. 26,080.55

Concept Capsule -14

TRICK
S borrows Rs. 5,00,000 to buy a house. If he pays
equal instalments for 20 years and 10% interest on
outstanding balance what will be the equal annual 10÷100 + 1 ÷ =, =… = GT (𝑴+ ) → 500,000 ÷
instalment? MRC = 58,729.12 (Approx.)
Solution:
press = button “20” times where n is equal to
We know
V no of years.
A=
P(n,i)
Here V = Rs. 5,00,000
n = 20
i = 10% p.a.= 0.10
V 5,00,000
∴A= = Rs.
P(n,i) P(20,0.10)
5,00,000
= Rs. [P (20, 0.10) = 8.51356
8.51356

= Rs. 58,729.84
Chap. 5 Time Value of Money 106

Present Value of an Annuity immediate

Present value of annuity due/immediate for n years is the same as an annuity regular for (n-1) years
plus an initial receipt or payment in beginning of the period. Calculating the present value of annuity
due involves two steps.
Step 1: Compute the present value of annuity as if it were an annuity regular for one period short. (n-
1) years
Step 2: Add initial cash payment/receipt to the step 1 value.
CALCULATOR TRICK TO COMPUTE PRESENT VALUE
Annuity Immediate
Apply Same trick as we Applied for annuity Regular Just Multiply the Final Outcome of Annuity
Regular Trick With (1 + r %)
Concept Capsule -15
Suppose your mom decides to gift you Rs. 10,000 TRICK
every year starting from today for the next five years.
You deposit this amount in a bank as and when you 10÷100+ 1 ÷ =... = GT × 10000 =
receive and get 10% per annum interest rate 37907.86
compounded annually. What is the present value of this press = button “10” times where n is equal
annuity? to no of years.
Solution:
It is an annuity immediate. For calculating value of the Since It it Annuity Due: Multiply With
annuity immediately following steps will be followed: (1 + r %)
Step 1: Present value of the annuity as if it were a
regular annuity for one year less i.e. for four years = 37907.86 × (1 + 10 %)
= Rs. 10,000 × P (4, 0.10) = 37907.86 × 1.1
= Rs. 10,000 × 3.16987 = 41,698.64
= Rs. 31,698.70
Step 2: Add initial cash deposit to the step 1 value Rs.
(31,698.70+10,000) = Rs. 41,698.70

Concept 9- Perpetuity

Perpetuity is a stream of payments or a type of annuity that starts payments on a fixed date and such
payments continue forever, i.e. perpetually. Thus, Perpetuity is a constant stream of identical annual
cash flows with no end, i.e. up to infinity.

Thus, it reflects the expected Present Value of all payments (to be received perpetually.
The Value of a Perpetuity is finite because receipts that are anticipated far in the future have extremely
low PV. Also, because the Principal is never repaid, there is no Present Value for the Principal.
Since Perpetuity is a type of annuity which is unending, its sum or Future Value cannot be calculated.

Examples:
(a) Dividend on Irredeemable Preference Share Capital
(b) Interest on Irredeemable Debt / Bonds
(c) Scholarships paid perpetually from an Endowment Fund, etc.
Chap. 5 Time Value of Money 107

PARTICULARS CONSTANT PERPETUITY GROWING PERPETUITY

𝐴 𝐴
PRESENT VALUE
𝐼 I−G

Here A = Annuity, I =Rate of Interest, G = Growth Rate

However, in this case perpetuity received in the beginning is not included therefore P.V of perpetuity
starting from the beginning = P.V of normal perpetuity + perpetuity received in the beginning

Concept Capsule -16

Determine the present value of perpetuity Rs 1,20,000 per year for infinite period at an effective
rate of interest of 12% p.a.?
Solution
P.V of perpetuity = (A / r) = Rs 1,20,000/0.12 = Rs 10,00,000.

Concept Capsule -17

Determine the present value of perpetuity Rs 1,20,00 per year (starting from the beginning) for
infinite period at an effective rate of interest of 12% p.a.?
Solution
P.V of normal perpetuity = (A/ r) = Rs 1,20,000/0.12 = Rs 10,00,000
= Rs 10,00,000 + Rs 1,20,000
= Rs 11,20,000

Concept Capsule -18

Determine the present value of perpetuity of Rs 1,00,000 per 6 months for an infinite period at an
effective rate of interest of 12% p.a.
Solution
In this case r would be as follows:
r = [ 4√(1 + 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)] − 1
4
r = ( √1.12) − 1
= 1.0287 – 1
= 0.0287
P.V of perpetuity = (A /r) = Rs 1,00,000/0.0287 = Rs 34,84,321.

Concept 10- Future Value & Compounding

Future Value: Future Value represents value at the end of nth year. Future Value is the cash value of
an investment at some time in the future. It is tomorrow's value of today's money compounded at
the rate of interest.

Example: If Rs. 1000 is invested in a Fixed Deposit that pays you 7% per annum as interest. At the
end of the year the amount would be Rs. 1070. This consists of the Original Principal of Rs. 1000 and
the interest earned of Rs. 70. Rs. 1070 is the Future Value of Rs. 1000 invested for one year at 7%.
Chap. 5 Time Value of Money 108

Similarly, it can also be concluded that Rs. 1000 today is worth Rs. 1070 in one year's time if the interest
rate is 7%.
From the formula of Amount under Compound Interest, we know that An= P (1 + R) n
Transposing the above formula & solving for FV, we have FV = CF (1 + R) n
Compounding: Compounding the present money to a future date involves finding out future value of
present money
Future Value of an Annuity Regular: It is the value of the Annuity at the end of n years.
Example: Consider an Annuity Payment of Rs. 5,000 for 5 years. The Value at the end of the 5 th year
would be Rs. 30,526 at Interest of 10% p.a compounded annually. This can be calculated as shown
below –

Year end Payments/Receipts (Rs.) Future Value

1 5000 = 5000 × (1.1)4 = 7321

2 5000 = 5000 × (1.1)3 = 6655

3 5000 = 5000 × (1.1)2 = 6050

4 5000 = 5000 × (1.1)1 = 5500

5 5000 = 5000 × (1.1)0 = 5000

Future Value of Annuity Cash Flow Rs. 30,526

Formula

Future Value of a Single Cash Flow Future Value of an Annuity Regular

[(𝟏+𝒊)𝒏 − 𝟏]
FV = CF (1+i) n CF ×
𝒊

Where n = number of years for which the money is invested

R = rate of return on the investment.

CALCULATOR TRICK TO COMPUTE FUTURE VALUE

Annuity Regular

Annuity is Given & Future Value is Asked

COMPONDIND PERIOD TRICK

1 + = R ÷ 100 + 1 × 1 =, =, =, =…. = GT × Annuity = FV

ANNUALY
press = button “n-1” times where n is equal to no of years.

1 + = R ÷ 200 + 1 × 1 =, =, =, =…. = GT × Annuity = FV

HALF YEARLY
press = button “n-1” times where n is equal to no of Half years.

1 + = R ÷ 400 + 1 × 1 =, =, =, =…. = GT × Annuity = FV

QUARTERLY
press = button “n-1” times where n is equal to no of Quarters.

1 + = R ÷ 1200 + 1 × 1 =, =, =, …. = GT × Annuity = FV
MONTHLY
press = button “n-1” times where n is equal to no of Months.
Chap. 5 Time Value of Money 109

Annuity is Given & Future Value is Asked

ANNUALY 1 + = R ÷ 100 + 1 ÷ =, =… = GT (𝑴+ ) → FV ÷ MRC = Annuity

press = button “n-1” times where n is equal to no of years.

HALF YEARLY 1 + = R ÷ 200 + 1 ÷ =, =… = GT (𝑴+ ) → FV ÷ MRC = Annuity

press = button “n-1” times where n is equal to no of Half years.

QUARTERLY 1 + = R ÷ 400 + 1 ÷ =, =… = GT (𝑴+ ) → FV ÷ MRC = Annuity

press = button “n-1” times where n is equal to no of Quarters.

MONTHLY 1 + = R ÷ 1200 + 1 ÷ =, =... = GT (𝑴+ )→ FV ÷ MRC = Annuity

press = button “n-1” times where n is equal to no of Months.

Concept Capsule -19

Find the future value of an annuity of Rs. 500 made TRICK
annually for 7 years at interest rate of 14%
compounded annually. Given that (1.14)7= 2.5023. 1 + = 14 ÷ 100 + 1 × 1 =, =…. = GT × 500 =
Solution: 5,365.24
Here annual payment A = Rs. 500 n= 7
i = 14% = 0.14 press = button “7-1 = 6” times where n is
Future value of the annuity equal to no of years.
(1 +0.14)7 − 1
A(7, 0.14) = 500 [ ]
(0.14)
500 × (2.5023 – 1)
= = Rs. 5,365.35
0.14

Concept Capsule -20

Rs. 200 is invested at the end of each month in TRICK
an account paying interest 6% per year
compounded monthly. What is the future value of 1 + = 6 ÷ 100 + 1 × 1 =, =…. = GT × 200 =
this annuity after 10th payment? Given that 2045.60 (Approx.)
(1.005)10 = 1.0511
Solution: press = button “10-1 = 9” times where n is
Here A = Rs. 200 n = 10 equal to no of years
i = 6% per annum = 6/12% per month = 0.005
Future value of annuity after 10 months is given
by
(1 + i)n − 1
A(n, i) = A [ ]
i
(1 +0.005)10 − 1
A(10, 0.005) = 200 [ ]
0.005
1.0511−1
= 200 [ ]
0.005

= 200 × 10.22 = Rs. 2,044

Chap. 5 Time Value of Money 110

Future Value of an Annuity immediate

Future value of an Annuity due/Annuity immediate = Future value of annuity regular x (1+i) where i is
the interest rate in decimal.

CALCULATOR TRICK TO COMPUTE FUTURE VALUE

Annuity Immediate

Annuity is Given & Future Value is Asked Future Value is Given & Annuity is Asked

Apply Same trick as we Applied for annuity Apply Same trick as we Applied for annuity
Regular Just Multiply the Final Outcome of Regular Just Divide the Final Outcome of
Annuity Regular Trick With (1 + r %) Annuity Regular Trick With (1 + r %)

Concept Capsule -21

Z invests Rs. 10,000 every year starting from today TRICK
for next 10 years. Suppose interest rate is 8% per
annum compounded annually. Calculate future value 1 + = 8 ÷ 100 + 1 × 1 =, =, =, =…. = GT ×
of the annuity. Given that (1 + 0.08)10 = 2.15892500. 10,000 = 144865.625
press = button “10-1= 9” times where n is
Solution: equal to no of years
Step - 1: Calculate future value as though it is an
ordinary annuity. Since It its Annuity Due: Multiply With
Future value of the annuity as if it is an ordinary (1 + r %)
annuity
(1 + 0.08)10– 1 = 144865.625× (1 + 8 %)
= Rs. 10,000 [ ]
0.08
= 144865.625× 1.08
= Rs. 10,000 × 14.4865625
= Rs. 1,56,454.875
= Rs. 1,44,865.625
Step-2: Multiply the result by (1 + i)
= Rs. 1,44,865.625 × (1 + 0.08)
= Rs. 1,56,454.875

Concept 11- Sinking Fund

It is the fund credited for a specified purpose by way of sequence of periodic payments over a time
period at a specified interest rate. Interest is compounded at the end of every period.
Basically, it involves determination of amount of annuity for a given Future value after a given period
at a given rate of interest.
Hence, formula relating to Future Value is used for the Purpose.

[(𝟏+𝒊)𝒏 − 𝟏]
CF ×
𝒊
Chap. 5 Time Value of Money 111

Concept Capsule -22

How much amount is required to be invested every TRICK
year so as to accumulate Rs. 300000 at the end of 10 1 + = 10 ÷ 100 + 1 × =, =… = GT (𝑀+ ) →
300,000 ÷ MRC = 18,823.64 (Approx.)
years if interest is compounded annually at 10%?
press = button “10-1=9” times where n is
Solution: equal to no of years.
This value can also be calculated by the formula of
future value of annuity regular. We know that
(1 + i)n − 1
A(n i) = A [ ]
i
(1 + 0.1)10 − 1
300000 = A [ ]
0.1

300000 = A×15.9374248
3,00,000
A=
15.9374248

= Rs. 18,823.62

Concept Capsule -23

How much amount is required to be invested in the TRICK
beginning of every year so as to accumulate Rs
10,00,000 at the end of 5 years if the effective rate of 1 + = 12 ÷ 100 + 1 × =.............. = GT
interest is 12% p.a. (𝑀+ ) → 10,00000 ÷ MRC =
Solution: 157409.73(Approx.)
In this case relevant number of years shall be 6 years press = button “10” times where n is
since in this case 1st annuity is payable in the beginning equal to no of years.
of 1st year.
Future value of an annuity of Rs 1 after 6 years
𝐴 Since It it Annuity Due: Divide With
= ( )[(1 + r)n – 1]
𝑟
(1 + r %)
1
= [(1 + 0.12)6 – 1] = 157409.73 ÷ (1 + 12 %)
0.12

= 8.3333(1.9738 – 1) = 140544.40 (Approx.)

= 8.3333 (0.9738)
= 8.115
This is the future value of an annuity of Rs 1 after 6
years. However, in this figure Rs 1 receivable at the end
of 6 year is included. Hence in this figure Rs 1 is
deducted to arrive at future value of an annuity of Rs 1 for
5-year receivable at the beginning of the year.
Therefore, future value of an annuity of Rs 1 for 5 year
invested at the beginning of the year
= 8.115 – 1
= 7.115
Let the amount of an annuity be ‘x’,
Therefore,
7.115x = 10,00,000
x = 10,00,000/7.115 = 1,40,548
Chap. 5 Time Value of Money 112

Application of Time Value of Money

Concept 12-Leasing Decision

Leasing is a financial arrangement under which the owner of the asset (lessor) allows the user of the
asset (lessee) to use the asset for a defined period of time (lease period) for a consideration (lease
rental) payable over a given period of time. This is a kind of taking an asset on rent.
A company may have to decide whether to obtain a machine either by leasing it for n years (the useful
life) at an annual rent of, say or by purchasing the machine.

In such situation, we find the present value of a lease rentals (as they are paid at regular interval
over a period of time it can be referred as Annuity) for n years at the interest rate r% per annum.
We compare this value with the purchase price and then decide accordingly.

Tutorial Note : If PV of Lease Rentals is less than Purchase Price then leasing is preferable to
lessee

Concept Capsule -24

ABC Ltd. wants to lease out an asset costing Rs. TRICK
3,60,000 for a five-year period. It has fixed a rental of PV of Lease Rentals
Rs. 1,05,000 per annum payable annually starting from
the end of first year. Suppose rate of interest is 14% per 14 ÷ 100 + 1 ÷ =, =, =, =…………. = GT ×
annum compounded annually on which money can be 1,05000 = 3,60473.50
invested by the company. Is this agreement favorable press = button “5” times where n is equal
to the company? to no of Installment.
Solution:
First, we have to compute the present value of the As We Can See that
annuity of Rs. 1,05,000 for five years at the interest PV of Lease Rentals > Purchase Price
rate of 14% p.a. compounded annually. Leasing is Not Preferable.
The present value V of the annuity is given by
V = A.P (n, i)
= 1,05,000 × P (5, 0.14)
= 1,0,5000 × 3.43308 = Rs. 3,60,473.40
which is greater than the initial cost of the asset and
consequently leasing is not favorable to the
Company.

Concept 13- Investment Decision

Capital expenditure means purchasing an asset (which results in outflows of money) today in
anticipation of benefits (cash inflow) which would flow across the life of the investment.
For taking investment decision we need to compute NET PRESENT VALUE (NPV)

NPV = PV of all Cash Inflow – PV of all Cash Outflow

Chap. 5 Time Value of Money 113

Situation-1 When We have to decide whether to invest or not?

PARTICULARS INVESTMENT DECISION

If Present Value of Cash Inflow > Present Value of Cash Outflow Invest

If Present Value of Cash Inflow < Present Value of Cash Outflow Don’t Invest

If Present Value of Cash Inflow = Present Value of Cash Outflow Indifference Point

Situation-2 When We have to decide to invest but we have to decide in which option to invest?
In such situation we will compute NPV under Both the option and the option with higher NPV will be
chosen

Concept Capsule -25

A machine can be purchased for Rs. 50000. Machine TRICK
will contribute Rs. 12000 per year for the next five
years. Assume borrowing cost is 10% per annum Compute PV of Cash Inflow with PV Trick.
compounded annually. Determine whether machine 10 ÷ 100 + 1 ÷ =, =, =, =…………. = GT ×
should be purchased or not. 1,2000 = 45,489.44
Solution: press = button “5” times where n is equal to
The present value of annual contribution no of Installment.
V = A.P(n, i)
= 12,000 × P(5, 0.10) As We Can See that
= 12,000 × 3.79079 PV of Cash Inflow - PV of Cash Outflow
= Rs. 45,489.48 NPV<0
which is less than the initial cost of the machine. Therefore, Machine must not be purchased.
Therefore, machine must not be purchased.

Concept Capsule -26

A machine with useful life of seven years costs Rs. TRICK
10,000 while another machine with useful life of five
years costs Rs. 8,000. The first machine saves labor Compute PV of Cash Inflow of Machine1
expenses of Rs. 1,900 annually and the second one with PV Trick.
saves labor expenses of Rs. 2,200 annually. 10 ÷ 100 + 1 ÷ =, =, =, =…………. = GT ×
Determine the preferred course of action. Assume 1,900 = 9250 (Approx.)
cost of borrowing as 10% compounded per annum. press = button “7” times where n is equal to
Solution: Life of Machine.
The present value of annual cost savings for the first
machine NPV of Machine 1
= Rs. 1,900 × P (7, 0.10) PV of Cash Inflow - PV of Cash Outflow
= Rs. 1,900 × 4.86842
= Rs. 9,249.99 9250-10000 = -750
= Rs. 9,250
Chap. 5 Time Value of Money 114

Cost of machine being Rs. 10,000 it costs more by Compute PV of Cash Inflow of Machine2
Rs. 750 than it saves in terms of labor cost. The with PV Trick.
present value of annual cost savings of the second 10 ÷ 100 + 1 ÷ =, =, =, =…………. = GT ×
machine 2200 = 8340 (Approx.)
= Rs. 2,200 × P(5, 0.10) press = button “5” times where n is equal to
= Rs. 2,200 × 3.79079 Life of Machine.
= Rs. 8,339.74 NPV of Machine 2
Cost of the second machine being Rs. 8,000 effective PV of Cash Inflow - PV of Cash Outflow
savings in labor cost is Rs. 339.74. Hence the second 8000-8350 = 350
machine is preferable.
Since
NPV of Machine 1 > NPV of Machine 2
Hence the second machine is preferable

Concept 14- Bond Valuation

A bond is a debt security in which the issuer owes the holder a debt and is obliged to repay the principal
and interest. Bonds are generally issued for a fixed term longer than one year.
If an investor requires a rate of return which is greater than a nominal interest rate of the bond, then he
should purchase it from the market at a price lower than the price, The purchase price is equal to sum
of Present value of all the inflows of the bonds (interest & maturity payment) discounted at desired rate
of return.

Value of Present Value of interest Present value of Maturity

= +
Bond Payments Payments

Tutorial Note
Present value will be calculated by using same Trick & Formula as we Discussed in Concept of Present
Value.
Concept Capsule -27
An investor intends purchasing a three-year Rs. TRICK
1,000 par value bond having nominal interest rate Value of Bond
of 10%. At what price the bond may be purchased (a)Present Value of interest Payments
now if it matures at par and the investor requires a +
rate of return of 14%? (b)Present value of Maturity Payments
Solution:
Present value of the bond (a) Present Value of interest Payments
100 100 100 100
= (1+0.14)1 + (1+0.14)2 + (1+0.14)3 + (1+0.14)3
14 ÷ 100 + 1 ÷ =, =, =, =…………. = GT × 140 =
= 100 × 0.87719 + 100 × 0.769467 + 100 × 0.674 325.02846 (Approx.)
972 + 1,000 × 0.674972
(b) Present value of Maturity Payments
= 87.719+ 76.947+ 67.497+ 674.972 = 907.125
Thus, the purchase value of the bond is Rs. = 1000 × 674 = 674.971
907.125
Total (a) + (b) = 999.99 (Approx.)
Chap. 5 Time Value of Money 115

Concept 15-Nominal Rate of Return

A nominal rate of return is nothing but the total amount of money that is earned from a particular
investing activity before taking, inflation, into the due consideration. It’s the basic return offered by
investment.
Simply we can say nominal rates are not adjusted for inflation
Nominal Interest Rate = Real Interest Rate + Inflation

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒−𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒

Nominal rate of return =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
× 100

Concept Capsule -28

An individual has made an investment of Rs.125,000 in a no-fee fund for a time of 1 year. At the
end of the year, the value of investment increases to Rs.130,000.
Solution:
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒−𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
Nominal rate of return = × 100
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒

130,000−125,000
= × 100 = 4%
125,000

Concept 16-Real Rate of Return

The real rate of return is the actual annual rate of return after taking into consideration the factors that
affect the rate like inflation and it is calculated by one plus nominal rate divided by one plus inflation
rate minus one and inflation rate can be taken from consumer price index or GDP deflator.
Simply we can say nominal rates are adjusted for inflation
Real Rate of Return = Nominal Rate of Return - Inflation

1+𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑅𝑎𝑡𝑒
Real Rate of Return = –1
1+𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒

Concept Capsule -29

Ms. Soul has kept Rs.100,000 in a bank. The bank promises to pay a 6% rate of return at the end
of the year. The inflation rate is 3% during the year. What would be the real rate of return?
Solution:
1+𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑅𝑎𝑡𝑒
Real Rate of Return = –1
1+𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒
= (1 + 0.06) / (1 + 0.03) – 1
= 1.06 / 1.03 – 1
= 0.0291 = 2.91%.

Concept 17-Compound Annual Growth Rate

Compound annual growth rate, or CAGR, is the mean annual growth rate of an investment over a
specified period of time longer than one year. It represents one of the most accurate ways to calculate
and determine returns for individual assets, investment portfolios, and anything that can rise or fall in
value over time.
The CAGR is a mathematical formula that provides a "smoothed" rate of return. It is really a pro
forma number that tells you what an investment yields on an annually compounded basis — indicating
to investors what they really have at the end of the investment period.
1
Total Return+Initial Investment n
Compound Annual Growth Rate (CAGR) = [ ] −1
Initial Investment

Here n represent period of holding = 𝑡𝑛 − 𝑡0

Chap. 5 Time Value of Money 116

Concept Capsule -30

Suppose the revenues of a company for four years, V(t) in the above formula, have been
Year 2013 2014 2015 2016

Revenues 100 120 160 210

Calculate Compound annual Growth Rate.

Solution:
tn – t0 = 2016 - 2013 = 3
The CAGR revenues over the three-year period from the end of 2013 to the end of 20016 is
1
210 3
CAGR (0, 3) = ( ) - 1 = 1.2774 - 1 = 27.74%
100
 MIND MAP

TIME VALUE OF MONEY

SIMPLE INTREST CI-BASIC PROBLEM CI-ADVANCE PROBLEM EFFECTIVE RATE & DERP
PROBLEMS 17. The effective rate of interest
1. S.I on Rs. 3500 for 3 years at 12% per annum 6. If P = Rs. 1000, R = 5% p.a., n = 4; 13. How many years it take for
investment of Rs. 1,000 to double corresponding to a nominal rate 3%
is What is Amount and C.I. is
itself when interest is compounded p.a. payable half yearly is
(a)Rs. 1200 (b) 1260 (a)Rs. 1215.50, Rs. 215.50
annually at 6% [Given : (1.06)11.9 = (a) 3.2% (b)3.25
(c) 2260 (d)none of these (b)Rs. 1125, Rs. 125
2.0005] (c) 3.0225% p.a. (d) None
(c)Rs. 2115, Rs. 115
2. A certain sum of money trebles itself in 10 (a) 11 years (b) 11.3 years 18. The effective rate of interest
7. Rs. 100 will become after 20 years at (c) 11.6 years (d)11.9 years
years at a certain rate of S.I. p.a. then the rate corresponding a nominal rate of 7%
5% p.a. compound interest amount
of interest is 14. In how many years will a sum p.a. convertible quarterly is
(a)Rs. 250 (b)Rs. 205
(a) 20% (b) 10% become 27 times when it trebles (a) 7% (b) 7.5%
(c)Rs. 265.50 (d) None
(c) 5% (d) None itself in 2 years at C.I.? (c) 5% (d) 7.18%
8. If A = Rs. 1000, n = 2 years, R = 6% p.a. (a)9years (b) 6 years 19. Mr. Natarajan wants to make an
compound interest payable half-yearly, (c) 12 years (d)13 ½ years
3. A sum of money amount to Rs. 6200 is 2 investment of Rs. 50,000 in one of the
then principal (P) is
years and Rs. 7400 in 3 years. The principal 15. A certain sum of money amounts to two banks that fetches him the
(a) 888.80 (b)Rs.885
and rate of interest are Rs.2750 in 2 years and Rs.3125 in maximum return after 6 years. One
(c) 800 (d) None
(a)Rs. 3800 31.57% 3 years at same rate of compound bank offers 8% interest compounded
(b)Rs. 3000, 20% 9. Find the difference between the S.I. and interest, the sum of money is annually and the other offers 7.5%
(c)Rs. 3500, 15% C.I. on Rs.8000 for 3 years at 5% p.a. (a) Rs.2129.60 (b) Rs.2210.37 interest compounded semi –
(d) none of these (c) Rs.2531.62 (d)Data inadeq annually. Which bank should be
(a) Rs.65 (b)Rs.62
chosen, so that he gets the maximum
4. A sum of Rs. 46,875 was lent out at simple (c) Rs.61 (d) None
return?
interest and at the end of 1 year 8 months the 16. The annual birth and death rates
10. After Mr. Gupta introduced new norms, (a) First bank (b)Second bank
total amount was Rs. 50,000. Find the rate of per 1000 are 39.4 and 19.4
turnover of Gupta & sons went up from 20. A machine is depreciated at the rate
interest per cent per annum. respectively. The number of years
Rs. 100 million to Rs 300 million in 3 yrs. in which the population will be of 20% on reducing balance. The
(a) 4% (b) 5% The compounded growth rate of co. is doubled assuming there is no original cost of the machine was Rs.
(31/2 = 1.4422) immigration or emigration is 100000 and its ultimate scrap value
(c) 7% (d) None
(a)11.22% (b) 33.22% (a) 35 yrs. (b) 30 yrs. was Rs. 3000The effective life of the
5. It the simple interest on Rs. 20,000 increases (c) 40% (d) 44.22% (c) 25 yrs. (d)none of these machine is
by Rs. 4,000 with the increase of time by 4 (a) 4.5 yrs. (b) 5.4 yrs. (c) 5 yrs.
Yrs. Find the rate per cent per annum. 11. Mohan borrows Rs. 50,000 from a bank
21. The useful life of a machine is
at 10% per annum. He repays Rs
(a) 0.15% (b) 0.5% estimated to be 10 years and cost Rs.
25,000 at the end of each year. What
10000. Rate of depreciation is 10%
(c) 5% (d) None amount does he owe to the bank after
p.a. The scrap value at the end of its
the second repayment?
life is
(a)Rs. 10,000 (b)Rs. 8,000
(a)Rs. 3486 (b)Rs.4383
(c)Rs. 12,000 (d)Rs. 18,000
(c)Rs. 3400 (d)Rs. 10000
Chap. 5 Time Value of Money 118

EXERCISE

Problems on Simple Interest

1. S.I on Rs. 3500 for 3 years at 12% per annum is

(a)Rs. 1200 (b) 1260 (c) 2260 (d)none of these

2. P = 5000, R = 15, T = 4½ using 1 = PRT/100, 1 will be

(a)Rs. 3375 (b)Rs. 3300 (c)Rs. 3735 (d)none of these

3. If P = 5000, T = 1, I = Rs. 300, R will be

(a) 5% (b) 5% (c) 6% (d)none of these

4. If P = Rs. 4500, A = Rs. 7200, then Simple interest i.e. I will be

(a)Rs. 2000 (b) 3000 (c)Rs. 2500 (d) Rs.2700

5. P = Rs. 12000, A = Rs. 16500, T = 2½ years, Rate percent per annum simple interest will be
(a) 15% (b) 12% (c) 10% (d)none of these

6. P = Rs. 10000, I = Rs. 2500, R =12½% SI. The number of years T will be
(a) 1½ years (b) 2 years (c) 3 years (d) none of these

7. P = Rs. 8500, A = Rs. 10200, R = 12½% SI, t will be.

(a) 1 yr. 7 month. (b) 2 yrs. (c) 1½ yr. (d)none of these

8. The sum required to earn a monthly interest of Rs. 1200 at 18% per annum SI is
(a)Rs. 50000 (b)Rs. 60000 (c)Rs. 80000 (d)none of these

9. A sum of money amount to Rs. 6200 is 2 years and Rs. 7400 in 3 years. The principal and rate of interest
are
(a)Rs. 3800 31.57% (b)Rs. 3000, 20%
(c)Rs. 3500, 15% (d) none of these

10. A sum of money doubles itself in 10 years. The number of years it would triple itself is
(a) 25 years. (b) 15 years. (c) 20 years (d) None of these

11. A lent a sum at 4% S.I. If interest in 8 years was Rs 3,400 less than the sum, find the sum
(a)Rs. 7,000 (b) Rs. 5,000 (c) Rs. 5,700 (d) Rs. 6,000

12. Out of Rs. 70,000, I invest Rs. 30,000 at 4% & Rs. 20,000 at 3% S. I.. At what rate of interest must I
invest the balance to get a return of 5% on whole amount per annum?
(a) 5% (b) 7% (c) 8% (d) 8.5%

13. X, Y and Z are the three sums of money such that Y is the simple interest on X and Z is the simple
interest on Y for the same time and rate. The relation between X, Y and Z is.
(a)x2 = YZ (b) Y2 = ZX (c) Z2 = XY (d) XYZ = 1

14. What sum will discharge a debt of Rs. 5,300 due after one and half year at 5% p.a. simple interest
today.
(a) Rs. 4,730 (b)Rs. 4,630 (c)Rs. 4,930 (d)Rs. 4,830

15. A sum of Rs. 46,875 was lent out at simple interest and at the end of 1 year 8 months the total amount
was Rs. 50,000. Find the rate of interest per cent per annum.
(a) 4% (b) 5% (c) 7% (d) None

16. It the simple interest on Rs. 20,000 increases by Rs. 4,000 with the increase of time by 4 Yrs. Find the
rate per cent per annum.
(a) 0.15% (b) 0.5% (c) 5% (d) None
Chap. 5 Time Value of Money 119

17. If the difference between simple interest on Rs. 4,000 and on Rs. 6,500 for 5 Yrs. Be Rs. 800 at same
rate of simple interest per annum. Then the rate of interest is
(a) 5.3% (b) 6.2% (c) 6.4% (d) None

18. A certain sum of money trebles itself in 10 years at a certain rate of S.I. p.a. then the rate of interest is
(a) 20% (b) 10% (c) 5% (d) None

19. A certain sum of money amounts to Rs.756 in 2 years and to Rs. 873 in 3.5 years at same rate of S.I.
p.a. The rate of interest is
(a)12% (b) 13% (c) 14% (d) None

20. Mrs. Sudha lent Rs. 4,000 in such a way that some amount to Mr.A at 3% p.a. S.I. and rest amount to B
at 5% p.a. S.I, the annual interest from both is Rs.144, Find the amount lent to Mr. A
(a) Rs. 2,800 (b) Rs. 1,200 (c) Rs. 2,500 (d) None

21. Rs. 1,521 is lent out in two parts in such a way that the S.I. on 1 st part at 10% for 5 years is equal to
that on 2nd part at 8% for 10 years. Find the both parts.
(a) Rs. 1,000 ; Rs. 521 (b) Rs. 920; Rs. 601
(c) Rs.936; Rs. 585 (d) None

22. A certain sum of money become six times at 5% S.I. p.a. At what rate % it will become 12 times.
(a) 15% (b)13% (c) 11% (d)None

23. A certain sum of money amounted to Rs. 765 at 8% in a certain time, in same time Rs. 640 amounted
Rs. 750 at 5% p.a. S.I. Find the sum.
(a)Rs. 500 (b) Rs. 600 (c) Rs. 700 (d)None

24. A certain sum of money amounts to Rs. 5,000 in 5 years at 10% p.a. In how many years will it amount
to Rs, 6,000 at same rate of S.L p.a.
(a) 10 years (b) 8 years (c) 6 years (d) None

25. Mr. X lent some amount of money at 4% S.L and he obtained Rs. 520 less than he lent in 5 years. The
sum lent is
(a) Rs. 620 (b) Rs. 650 (c) Rs. 750 (d) None

26. If the simple interest on Rs. 750 is less than the interest on Rs. 845 at 10% p.a. S.I. by Rs. 57. Find the
time
(a) 4 years (b) 5 years (c) 6 years (d) None

27. The simple interest in 14 months on a certain sum of money at the rate of 6% p.a. is Rs. 250 more than
the interest on the same sum at the rate of 8% p.a. in 8 months. How much amount was borrowed?
(a) Rs. 15,000 (b) Rs. 25,000 (c) Rs. 7,500 (d) None

28. Mr. X borrows Rs. 7,000 from ICICI bank at S.I. He paid Rs. 3,000 after 3 years and Rs. 5,450 in next 2
years to settle the account. Find the rate of interest
(a) 5% (b) 6% (c) 8% (d) None

29. If S.I. on a certain sum of money Rs. 100 is Rs. 9 and the number of years and rate % are equal. Find
the rate per cent.
(a) 3% (b) 4% (c) 5% (d) None
Problems on Compound Interest

30. If P = Rs. 1000, R = 5% p.a., n = 4; What is Amount and C.I. is

(a)Rs. 1215.50, Rs. 215.50 (b)Rs. 1125, Rs. 125
(c)Rs. 2115, Rs. 115 (d) none of these
31. Rs. 100 will become after 20 years at 5% p.a. compound interest amount
(a)Rs. 250 (b)Rs. 205 (c)Rs. 265.50 (d)none of these
Chap. 5 Time Value of Money 120

32. If A = Rs. 1000, n = 2 years, R = 6% p.a. compound interest payable half-yearly, then principal (P) is
(a)Rs. 888.80 (b)Rs. 885 (c) 800 (d)none of these

33. The population of a town increases every year by 2% of the population at the beginning of that year.
The number of years by which the total increase of population be 40% is
(a) 7 years (b) 10 years (c) 17 years (d) none of these

34. The difference between C.I. and S.I on a certain sum of money invested for 3 years at 6% p.a is Rs.
110.16. The sum is?
(a)Rs. 3000 (b)Rs. 3700 (c)Rs. 12000 (d) Rs. 10000

35. The C.I on Rs. 16000 for 1½ years at 10% p.a. payable half yearly is
(a)Rs. 2222 (b)Rs. 2522 (c)Rs. 2500 (d)none of these

36. The C.I. on Rs. 40000 at 10% p.a. for 1 year when the interest is payable quarterly is
(a)Rs. 4000 (b)Rs. 4100 (c)Rs. 4152.51 (d) none of these

37. The difference between the S.I and the C.I on Rs. 2400 for 2 years at 5% p.a. is
(a)Rs. 5 (b)Rs. 10 (c)Rs. 16 (d)Rs. 6

38. The annual birth and death rates per 1000 are 39.4 and 19.4 respectively. The number of years in
which the population will be doubled assuming there is no immigration or emigration is
(a) 35 yrs. (b) 30 yrs. (c) 25 yrs. (d)none of these

39. The C.I on Rs. 4000 for 6 months at 12% p.a. payable quarterly is
(a)Rs. 243.60 (b)Rs. 240 (c) 243 (d) none of these

40. The compound interest in charged on a sum of rs. 15,000 is 10% p.a. for the 1 st year, 12% p.a. for the
2ndyar& 15% p.a. for the 3rd year, interest being compounded annually in all the cases. What is the
total interest is payable at the end of 3 years?
(a)Rs. 7,273 (b)Rs. 6,067 (c)Rs. 6252 (d)Rs. 5,268

41. Mohan borrows Rs. 50,000 from a bank at 10% per annum. He repays Rs 25,000 at the end of each
year. What amount does he owe to the bank after the second repayment?
(a)Rs. 10,000 (b)Rs. 8,000 (c)Rs. 12,000 (d)Rs. 18,000

42. A sum at C.I. becomes Rs. 1,020 after 3 yrs. & Rs.1,088 after 4 yrs. The rate of interest is
(a) 5.60% (b) 6.66% (c) 7.66% (d) 8.66%

43. A sum at C.I. becomes Rs. 6,500 after 6 years &Rs. 7,800 after a further period of 2 more years. The
amount due after a further period of 2 more years is –
(a)Rs. 9,360 (b)Rs. 6,500 (c)Rs. 9,100 (d)Rs. 9,390

44. How many years it take for investment of Rs. 1,000 to double itself when interest is compounded
annually at 6% [Given: (1.06)11.9 = 2.0005]
(a) 11 years (b) 11.3 years
(c) 11.6 years (d)11.9 years

45. After Mr. Gupta introduced new norms, turnover of Gupta & sons went up from Rs. 100 million to Rs
300 million in 3 yrs. The compounded growth rate of co. is (31/2 = 1.4422)
(a)11.22% (b) 33.22% (c) 40% (d) 44.22%

46. Find the amount of Rs.2000 after 10 years at 8% converted quarterly for the 1st 4 years and 6%
converted monthly thereafter.
(a) Rs.4025.50 (b) Rs.3931.78 (c)Rs.2600.50 (d) None

47. If the compound Interest on a certain sum of money for 2 years at 4% p.a. be Rs.510, then its simple
Interest (S.L) of same time at same rate of interest is
(a) Rs.500 (b) Rs.510 (c) Rs.450 (d) None
Chap. 5 Time Value of Money 121

48. If the S.I. on a certain sum of money for 3 years at 5% p.a. is Rs. 1260. Then its compound interest (C.I.)
is
(a) Rs.1324.05 (b) Rs.1330 (c) Rs. 1425 (d) None

49. If the difference between C.I and S.I on a certain sum of money at 5% p.a. for 2 years is Rs. 1.50. Find
the sum of money.
(a) Rs. 600 (b) Rs.500 (c) Rs. 400 (d) None

50. Find the difference between the S.I. and C.I. on Rs.8000 for 3 years at 5% p.a.
(a) Rs.65 (b) Rs.62 (c) Rs.61 (d) None

51. A certain sum of money amounts to Rs.752 in 20 years and Rs.7896 in 21 years at rate of interest
compounded annually the rate of interest is
(a) 9.5% (b) 8% (c) 10% (d) None

52. A certain sum of money amounts to Rs.2750 in 2 years and Rs.3125 in 3 years at same rate of
compound interest, the sum of money is
(a) Rs.2129.60 (b) Rs.2210.37
(c) Rs.2531.62 (d) Data inadequate.
53. The ratio of Cl and SI on a certain sum of money at 10% p.a. for 2 years is
(a) 8:5 (b) 20: 19 (c) 21:20 (d) None
54. Sohan deposited Rs.4800 in a bank after 4years it becomes Rs.6000 at a certain rate of compound
interest what will be his amount in the bank after 12 years.
(a) Rs.9375 (b) Rs.9000 (c) Rs.9525 (d) None

55. Mr. X lent Rs.6100 to Mr. A and Mr. B at same rate of compound interest of 20% p.a. so that A’s share
at the end of 3 years may equal to B’s share at the end of 5 years.
(a) Rs.3500; Rs.2600 (b) Rs.3600; Rs.2500
(c) Rs.3400; Rs.2700 (d) None
56. A money- lender charges ‘interest’ at the rate of 5 rupees per 100 rupees per quarter, Payable in
advance. What effective rate does he charge per annum?
(a) 22.6% (b) 12.8% (c) 22,8% (d) None of these

57. The simple interest on Rs.300 for 4 years together with that on Rs.500 for 3 years came to Rs.162, the
rate being the same in both cases. Find the rate percent of interest.
(a)4% (b) 6% (c) 7% (d) None of these

Problems on Effective Rate

58. The effective rate of interest corresponding to a nominal rate 3% p.a. payable half yearly is
(a) 3.2% (b) 3.25% p.a. (c) 3.0225% p.a. (d) None of these

59. The effective rate of interest corresponding a nominal rate of 7% p.a. convertible quarterly is
(a) 7% (b) 7.5% (c) 5% (d) 7.18%

60. Mr. Natarajan wants to make an investment of Rs. 50,000 in one of the two banks that fetches him the
maximum return after 6 years. One bank offers 8% interest compounded annually and the other offers
7.5% interest compounded semi – annually. Which bank should be chosen, so that he gets the
maximum return? [Given: (1.08)6 = 1.5869 and (1.0375)12 = 1.5554]
(a) First bank (b) Second bank
(c) Any of the two bank (d) Both the banks.
Problems on Depreciation
61. A machine is depreciated at the rate of 20% on reducing balance. The original cost of the machine was
Rs. 100000 and its ultimate scrap value was Rs. 3000The effective life of the machine is
(a) 4.5 years (appx.) (b) 5.4 years (appx.)
(c) 5 years (appx.) (d) None of these
Chap. 5 Time Value of Money 122

62. The useful life of a machine is estimated to be 10 years and cost Rs. 10000. Rate of depreciation is 10%
p.a. The scrap value at the end of its life is
(a) Rs. 3486 (b) Rs. 4383 (c) Rs. 3400 (d) Rs. 10000

63. A machine is depreciated at the rate of 10% on reducing balance. The original cost was Rs. 10,000 and
the ultimate scrap value was Rs.3,750. Find the effective life of the machine. (Given: log 2 = 0.30103,
log 3= 0.47712).
(a) 5 yrs. (b) 5.19 yrs. (c) 9.3 yrs. (d) None of these

Advance Problems

64. In how many years will a sum become 27 times when it trebles itself in 2 years at C.I.?
(a) 9 years (b) 6 years (c) 12 years (d)13 ½ years

65. The compound interest on a sum for two years is Rs. 1,575 and the corresponding simple interest is
Rs. 1,500. Find the compound interest on the same sum at the same rate of interest at the end of third
year.
(a)Rs. 2,428.50 (b)Rs. 2,482.50
(c)Rs. 2,284.50 (d)Rs. 2,382.50

66. A certain sum was lent at compound interest, compounded annually for three years. The rate of
interest for each of the three years was 20%, 15% and 10% p.a. respectively. If the same sum was lent
at a constant rate of simple interest for the same period, then what would have been the interest rate
for obtaining the same amount of interest?
(a) 17.27% (b) 17% (c) 18% (d) 18.27%

67. The difference between C.I. & S.I. on a sum for 3 years at 10% p.a. is Rs. 1550. The sum is
(a) 40000 (b) 50000 (c) 45000 (d) 48000

Problems on Present Value

Ordinary Annuity
68. The present value of an annuity of Rs. 3000 for 15 years at 4.5% p.a. CI is
(a)Rs. 23809.41 (b)Rs. 32218.63
(c)Rs. 32908.41 (d) none of these

69. A loan of Rs. 10.000 is to be paid back in 30 equal instalments. The amount of each installment to cover
the principal and at 4% p.a. CI is
(a)Rs. 587.87 (b)Rs. 587
(c)Rs. 578.87 (d) none of these

70. A company borrows Rs. 10000 on condition to repay it with compound interest at 5% p.a. by annual
installments of Rs. 1000 each. The number of years by which the debt will be clear is
(a) 14.2 yrs. (b) 10 yrs. (c) 12 yrs. (d) None of these

71. Mr. Paul borrows Rs. 20000 on condition to repay it with C.I. at 5% p.a. in annual installments of Rs.
2000 each. The number of years for the debt to be paid off is
(a) 10 yrs. (b) 12 yrs. (c) 11 yrs. (d) None of these

72. The present value of annuity of Rs. 5000 per annum for 12 years at 4% p.a. C.I. annually is
(a)Rs. 46000 (b)Rs. 46850
(c)Rs. 15000 (d) none of these

73. Y bought a TV costing Rs. 13,000 by making a down payment of Rs. 3000 and agreeing to make equal
annual payment for four years. How much would be each payment if the interest on unpaid amount
be 14% compounded annually?
(a) Rs. 3,432.05 (b) Rs. 3,932.05 (c)Rs. 15000 (d) none of these
Chap. 5 Time Value of Money 123

74. The amount of an annuity due consisting of 15 annual payments invested at 8% effective is Rs. 10,000.
Find the size of each payment.
(a) Rs.873.86 (b) Rs. 108.60 (c) Rs.341.01 (d) none of these

75. Arjun buys a house for which he agrees to pay Rs. 5000 at the end of each month for 8 years. If money
is worth 12% converted monthly, what is the capital value of the house?
(a) Rs. 307638.50 (b) Rs. 310825.60 (c) Rs. 25902.75 (d) None of these

76. Munna purchased LED TVpayingRs.5,000 down and promising to pay Rs.200 every quarter for next
10 years. The seller charges interest at the rate of 12% per annum compounded quarterly. If Munna
missed the first 10 payments, what must he pay when the 11th payment is due to discharge his entire
loan?
(a) Rs.5873.86 (b)Rs.7108.60 (c) Rs.6399.26 (d) None of these

Due Annuity
77. Suppose your Mom decides to gift you Rs 10,000 every year starting from today for the next five year.
You deposit this amount in a bank as and when you receive and get 10% per annum interest rate
compounded annually. What is present value of annuity?
(a)Rs. 41698.70 (b)Rs. 51820.40
(c)Rs. 60000 (d) none of these

78. Ram purchased a house for which he agreed to pay Rs.5000 at the beginning of each 3 months until he
has made 10 payments. If money is worth 6% compounded quarterly, what is the equivalent cash price
of the house?
(a) Rs. 46802.58 (b) Rs. 47108.60
(c) Rs. 46399.26 (d) None of these

79. The value of each equal instalment made at the beginning of each year for 10 years will pay for a piece
of property priced at Rs.80,000, if money is worth 7% effective?
(a) Rs. 15873.86 (b) Rs. 10645.05
(c) Rs. 16399.26 (d) none of these

Perpetual Annuity
80. The value of the present value of a sequence of payments of Rs. 80 made at the end of each 6 months
and continuity forever, if money is worth 4% compounded semi-annually is....
(a) Rs. 4,000 (b) Rs. 5,000
(c) Rs. 3,000 (d) None of these

81. How much money is needed to endure Machine costing Rs. 2,500 at the beginning of each year
indefinitely, if money is worth 3% compounded annually?
(a) Rs. 80,454.67 (b) Rs.85,833.33
(c) Rs. 90,350.45 (d) None of these

82. At what rate converted semi-annually will the present value of a perpetuity of Rs. 450 payables at the
end of each 6 months be Rs. 20,000?
(a) 3.5% (b) 4% (c) 4.5% (d) None of these

83. Assuming that the discount rate is 10% per annum, how much would you pay to receive Rs.800,
growing at 8%, annually, forever?
(a) 1000 (b) 1500 (c) 2200 (d) None of these

Problems on Future Value

Ordinary Annuity
84. The amount of an annuity certain of Rs. 150 for 12 years at 3.5% p.a. C.I is
(a)Rs. 2190.28 (b)Rs. 1290.28
(c)Rs. 2180.28 (d) none of these
Chap. 5 Time Value of Money 124

85. A = Rs. 1200 n = 12 yrs. i = 0.08 v =?

𝐴 1
Using the formula 𝑉 = [1 − 𝑛 ] value of v will be
𝑖 (1+𝑖)
(a)Rs. 3039 (b)Rs. 3990
(c)Rs. 9930 (d) none of these

86. a = Rs. 100 n = 10, i = 5% find the FV of annuity

Using the formula FV = a / {(1 + i) n − 1}, FV is equal to
(a)Rs. 1258 (b)Rs. 2581
(c)Rs. 1528 (d) none of these

87. If the amount of an annuity after 25 years at 5% p.a C.I is Rs. 50000 the annuity will be
(a)Rs. 1406.90 (b)Rs. 1046.90
(c)Rs. 1146.90 (d) none of these

88. Given annuity of Rs. 100 amounts to Rs. 3137.12 at 4.5% p.a C.I. The number of years will be
(a) 25 yrs. (appx.) (b) 20 yrs. (appx.)
(c) 22 yrs. (d)none of these

89. Mr. X borrowed Rs. 5120 at 12½ p.a. C.I. At the end of 3 yrs., the money was repaid along with the
interest accrued. The amount of interest paid by him is
(a)Rs. 2100 (b)Rs. 2170 (c)Rs. 2000 (d) None of these

90. A person invests Rs. 500 at the end of each year with a bank which pays interest at 10% p. a. C.I.
annually. The amount standing to his credit one year after he has made his yearly investment for the
12th time is.
(a)Rs. 11764.50 (b)Rs. 10000 (c)Rs. 12000 (d) none of these

91. Rs 200 is invested at the end of each month in an account paying interest 6% per year compounded
monthly. What is the future value of this annuity after 10 TH payment?
(a) Rs. 2044 (b)Rs. 5000
(c)Rs. 1200 (d) none of these

92. Find the future value of an annuity of Rs. 500 made annually for 7 years at interest rate of 14%
compounded annually. Given that (1.14)7= 2.5023.
(a) Rs. 5,365.35 (b)Rs. 5000
(c)Rs. 6500 (d) none of these

93. Rs. 200 is invested at the end of each month in an account paying interest 6% per year compounded
monthly. What is the future value of this annuity after 10 th payment? Given that (1.005)10 = 1.0511
(a) Rs2500 (b) Rs. 2,044
(c)Rs. 1850 (d) none of these

94. An annuity consisting of payments of Rs. 500 made at the end of every 3 months for 4 years at the rate
of 6% compounded quarterly. Its Future value is...
(a) Rs. 8966.18 (b)Rs. 8108.60
(c) Rs. 9602.75 (d) none of these

95. An annuity consisting of equal payments at the end of each month for 2 years is to be purchased for
Rs. 2000. If the interest rate is 6% compounded monthly, how much is each payment?
(a) Rs.73.86 (b) Rs.31.60 (c) Rs.78.64 (d) None of these

Due Annuity
96. Z invested Rs 10,000 every year starting from today for next 10 Years. Suppose interest rate 8% per
annum compounded annually. Calculate future value of the annuity.
(a) Rs. 1,56,454.875 (b)Rs. 1,60,500.900
(c)Rs. 1,80,500.900 (d) none of these
Chap. 5 Time Value of Money 125

97. At the Beginning of each Period Consisting of 6-months, Rs 500 is deposited into saving account that
pays 5% compounded half-yearly. Find the balance in the account at the end of each year.
(a) Rs.5724 (b) Rs.5742
(c) Rs.5472 (d) None of these

98. A Bank Pay interest at the rate of 8% per annum compounded quarterly. Find how much should be
deposited in the bank at the beginning of each quarter in order to accumulate Rs.80,000 in 3 Years.
(a) Rs 5,884 (b) Rs.5,488
(c) Rs.5,848 (d) Rs.4,588
Sinking Fund

99. A person desires to create a fund to be invested at 10% CI per annum to provide for a prize of Rs. 300
every year. Using V = a/1 find V and V will be
(a)Rs. 2000 (b) 2500 (c)Rs. 3000 (d) none of these

100. How much amount is required to be invested every year so as to accumulate Rs. 300000 at the end of
10 years if interest is compounded annually at 10%?
(a) Rs. 18,823.62 (b) 25,000.62 (c)Rs. 16,000 (d) none of these

Capital Expenditure

101. A machine with useful life of 7 years costs Rs. 10,000 while another machine with useful life of 5 years
costs Rs. 8,000. The first machine saves labor expenses of Rs. 1900 annually and the second one saves
labor expenses by Rs. 2,200 annually. Determine the preferred course of action. Assume cost of
borrowing as 10% per annum.
[Given: (1.1)7= 1.9487, (1.1)5= 1.610]
(a) First machine (b) Second machine
(c) Any of two machine (d) Both the machine.

102. A company may obtain a machine either by taking it on lease for 5 years (useful life) at an annual rent
of Rs. 2,000 or by purchasing the machine for Rs. 8,100. If the company can borrow money at 8% p.a.,
what is the present value of the preferable alternative?
(a) 7985.42 (b) 7875.42 (c) 7765.42 (d) None

Net Present Value

103. Assume cash outflow are Rs. 1,20,000 followed by cash inflows of Rs. 25,000 per year for 8 years and
cost of capital is 11% what is the net present value?
(a) Rs. 38,214 (b) Rs. 9,650 (c) Rs. 8,650 (d) Rs. 38,214

104. A company proposes to install a machine involving a capital cost of Rs. 3,60,000. The life of the machine
is 5 years and its salvage value at the end of the life is nil. The machine will produce the net cash flow
of Rs. 68,000 per annum. You are required to calculate NPV when discounting rate is
15 % pa. The net present value factors for 5 years as under
Discounting Rate 14 15 16 17 18
Cumulative factor 3.43 3.35 3.27 3.20 3.13
(a) - 13,2200 (b) 13,2200 (c) Rs. 15,500 (d) none of these
105. A company is considering the proposal of taking up a new project which requires an investment of Rs.
400 lakhs on machinery and other assets. The project is expected to yield the following cash flows
over the next five years.
The cost of raising the additional capital is 12% The scrap
Year Cash Flow (Rs. Lakhs)
value at the end of the five year may be taken as zero.
1 160
You are required to calculate the Net Present Value of the
2 160 project
3 180 (a) 197.91 (b) 132
4 180 (c) 250 (d) none of these
5 150
Chap. 5 Time Value of Money 126

Leasing Decision

106. A company is considering proposal of purchasing a machine either by making full payment of Rs. 4,000
or by leasing it for 4 years at an annual rent of Rs. 1,250. Which course of action is preferable, if the
company can borrow money at 14% per annum? [Given: (1.14)4 = 1.68896]
(a) Leasing is preferable (b) Leasing is not preferable
(c) Can’t say. (d) None of these

107. ABC Ltd. wants to lease out an asset costing Rs. 3,60,000 for a five-year period. It has fixed a rental of
Rs. 1,05,000 per annum payable annually starting from the end of first year. Suppose rate of interest
is 14% per annum compounded annually on which money can be invested by the company. Is this
agreement favorable to the company?
(a) Leasing is preferable (b) Leasing is not preferable
(c) Can’t say. (d) None of these

Valuation of Bond
108. An investor intends purchasing a three-year Rs. 1,000 par value bond having nominal interest rate of
10%. At what price the bond may be purchased now if it matures at par and the investor requires a
rate of return of 14%?
(a) Rs. 907.125 (b) 1000 (c) 825.45 (d)None of these

Compound Annual Growth Rate (CAGR)

109. Suppose the revenues of a company for four years, V(t) in the above formula, have been
Year 2013 2014 2015 2016

Revenues 100 120 160 210

Calculate Compound annual Growth Rate.

(a) =27.74% (b) 23.64% (c) 34.56% (d)None of these

Answer Sheet
1. b 2. a 3. c 4. d 5. a 6. b 7. a 8. c 9. a 10. c
11. b 12. d 13. b 14. c 15. a 16. c 17. c 18. a 19. b 20. a
21. c 22. c 23. b 24. b 25. b 26. c 27. a 28. a 29. a 30. a
31. c 32. a 33. c 34. d 35. b 36. c 37. d 38. a 39. a 40. c
41. b 42. b 43. a 44. d 45. d 46. b 47. a 48. a 49. a 50. c
51. a 52. a 53. c 54. a 55. b 56. c 57. b 58. c 59. d 60. a
61. b 62. a 63. c 64. a 65. c 66. a 67. b 68. b 69. c 70. a
71. d 72. b 73. a 74. c 75. a 76. c 77. a 78. a 79. b 80. a
81. b 82. c 83. a 84. a 85. d 86. a 87. b 88. d 89. b 90. a
91. a 92. a 93. b 94. c 95. c 96. a 97. b 98. c 99. c 100. a
101. b 102. a 103. c 104. a 105. a 106. a 107. a 108. a 109. a
Chap. 5 Time Value of Money 127

Past Exam Questions 9,774. Find the period for which the sum
was invested:
June-2012 (a) 7 years (b) 5.8 years
1. The S.I. on a sum of money is 49 of the principal (c) 6 years (d) 8 years
and the no. of years is equal to the rate of Answer:
interest per annum. Find the rate of interest (c) Principal (P) = Rs. 90,500
per annum? Wrong Rate (R1) = 5.7% p.a.
(a) 5% (b) 20/3% Correct Rate (R2) = 7.5% p.a.
(c) 22/7% (d) 6% T =?
Answer: diff in Amount = 9,774
R2 T R1 T
(b) Given Say Principal = P Diff in Amount =[P (1 + ) P (1 + )]
100 100
4
∴ S.I.= P R2T R1 T
9 9, 774 = P [1 + −1− ]
No. of years (time) T = Rate of interest (R) 100 100
PTR
7.5T 5.7T
∴ S.I. = 9, 774 = 90,500 [ − ]
100 100 100
∴ P=
4 P×R×R 1.8T
9 100 9, 774 = 90,500 ×
400 100
R2 = 9,774 × 1,000
9
20 T = =6
∴R= % 90,500 × 18
3

June-2013
2. Simple interest on Rs. 2,000 for 5 months at
16% p.a. is __________.
5. The difference between compound and
(a) Rs. 133.33 (b) Rs. 133.26
simple interest on a certain sum of money for
(c) Rs. 134.00 (d) Rs. 132.09
2 years at 4% p.a. is Rs. 1. The sum (in Rs.) is:
Answer:
(a) 625 (b) 630
(a) Given: Principal = Rs. 2,000
5 (c) 640 (d) .635
Time = yrs. (i.e. 5 months) Answer:
12
Rate = 16% p.a. (a) Let principal(p)=100, R=4%, T=2 yrs.
P×T×R PRT 100×4×2
∴ S.I = S.I. = = = Rs. 8
100 100 100
2,000×5×16 T 2
= R 4
12×100 C.I. = P [(1 + ) − 1] = 100 [(1 + ) −
100 100
S.I = Rs. 133.33
1]
December-2012 = 100[(1 + 0.04)2 − 1]
= 100 (1 +0.04)2- 1]
3. How much investment is required to yield an = 100 [(1.04)2 - 1]
Annual income of Rs. 420 at 7% p.a. Simple = 100 × (1.04 + 1) (1.04 - 1)
interest. = 100 × 2.04 × 0.04 = 8.16
(a) Rs. 6,000 (b) Rs. 6,420 difference b/w C.I. & S.I. = 8.16 - 8 = 0.16
(c) Rs. 5,580 (d) Rs. 5,000 If difference is Rs.0.16 then principal= 100
Answer: ∴ Rs. 1 =
10,00
0.16
(a) Given S.I = 420, T = 1 yrs., R = 7% p.a.
= Rs. 625
Let Investment (P) = Rs. x
S.I × 100 420 × 100
P= = = Rs. 6,000
R×T 7×1 6. A sum of money compounded annually
becomes Rs. 1,140 in two years and Rs. 1,710
4. Mr. X invests Rs. 90,500 in post office at in three years.Find the rate of interest per
7.5% p.a. simple interest. While calculating annum.
the rate was wrongly taken as 5.7% p.a. The (a) 30% (b) 40%
difference in amounts at maturity is Rs. (c) 50% (d) 60%
Answer:
Chap. 5 Time Value of Money 128

(c) Let principal be P and Rate is R % p.a. (d) Let Principal (P) =100, R = 6.25%p.a.
Case -1 Amount (A) = 200 T = ?
R T S.I. = A – P
A = P (1 + )
100 = 200 - 100 = 100
R 2 S.I.× 100 100 × 10000
= P (1 + ) ……..… (1) T= = = 16 yrs
100 P×R 100 × 625
Case - 2 9. What principal will amount to Rs. 370 in 6
R T
A = P (1 + ) years at 8% p.a. at simple interest?
100
R 3 (a) Rs. 210 (b) Rs. 250
1710 = P (1 + ) ……...… (2) (c) Rs.310 (d) Rs. 350
100
Divide by (2)/eq (1) Answer:
R 3 (b) Given Amount (A) = Rs. 370, T = 6 yrs, R
1710 p (1 + )
100
= R 2 = 8% p.a.
1140 p (1 + )
100
39 R Let P = Rs. x
= (1 + ) PRT x×8×6 48x
26 100 S.I.= = =
3 R 400 100 100
-1= 48x
2 100 A = P + S.I = x +
100
2R = 100
148x
R = 50% 370 =
100
370×100
x= = Rs. 250
148

December-2013
10. The partners A and B together lent Rs. 3,903
7. On what sum difference between compound at 4% per annum interest compounded
interest and simple interest for two years at annually. After a span of 7 years, A gets the
7% p.a. interest is Rs. 29.4 same amount as B gets after 9 years. The
(a) Rs. 5,000 (b) Rs. 5,500 share of A in the sum of Rs. 3,903 would
(c) Rs. 6,000 (d) Rs. 6,500 have been:
Answer: (a) Rs. 1,875 (b) Rs. 2,280
(c) Let the sum (P) Rs. = x Given R = 7% p.a.,T (c) Rs. 2,028 (d) Rs. 2,820
= 2yrs Answer:
PRT x7.2 14𝑥 (c) Let Principal of A (P1) = Rs. x
S.I. = = = = 0.14x
100 100 100 Rate R1 = 4% p.a.
R T
C.I. = P [(1 + ) − 1]s T1 =7 years
100
2 Principal of B (P2) = Rs. (3,903 - x)
7
= x [(1 + ) − 1] R2 = 4%
100
= x [(1.07)2 - 1] T2 = 9 years
C.I. = x [1.1449 - 1] Given A1 = A2
R1 T1 R2 T2
= x × 0.1449 P1 (1 + ) = P2 (1 + )
100 100
= 0.1449x 4 7 4 9
difference b/w C.I & S.I. = Rs. 29.4 x (1 + ) = (3,903 − x) (1 + )
100 I00
C.I - S.I. = 29.4 x (1.04)7 = (3,903 - x) (1.04)9
0.1449x - 0.14x = 29.4 x (1.04)9
=
3,903−x (1.04)7
0.0049x = 29.4
x
x=
29.4
= 6,000 = (1.04)2
0.0049 (3,903 − x)
x
= 1.0816
8. In what time will a sum of money double its y (3,903 − x)
at 6.25% p.a. simple interest? x = 1.0816 (3,903 - x)
(a) 5 years (b) 8 years x = 4,221.4848 - 1.0816x
(c) 12 years (d) 16 years x + 1.0816x = 4,221.4848
2.0816x = 4,221.4848
Answer: x = 4.221.4848
Chap. 5 Time Value of Money 129

2.0816 December-2014
x = 2,028
The share of A = 2,028 13. The future value of an annuity of Rs. 1,000
made annually for 5 years at the interest of
June-2014 14% compounded annually is:
(Given (1.14)5 = 1.92541)
11. If a sum triples in 15 years at simple rate of (a) Rs. 5,610 (b) Rs. 6,610
interest,* the rate of interest per annum will (c) Rs. 6,160 (d) Rs. 5,160
be: Answer:
(a) 13.0% (b) 13.3% (b) Annuity (A) = Rs. 1,000
(c) 13.5% (d) 18.0% n = 5, R =14%
Answer: R 4
i= = = 0.14
100 100
(b) Let Principal P = P
Future value
Amount A = 3P A
A (n, i) = [(1 + i)n - 1]
T = 15 years i
1,000
S.I. = A – P = [(1 + 0.14)5 - 1]
0.14
= 3P - P =
1,000
[(1.14)5 - 1]
0.14
= 2P 1,000
S.I.× 100 = × [1.92541 - 1]
R= 0.14
P×T 1,000
2 P × 100 = × 0.92541 = Rs. 6,610
= 0.14
P × 15
200
=
15 14. A sum of money invested of compound
40
R= interest doubles itself in four years. It
3
= 13.3% becomes 32 times of itself at the same rate
12. How much amount is required to be of compound interest in
invested every year as to accumulate Rs. (a) 12 years (b) 16 years
6,00,000 at the end of 10 years, if interest is (c) 20 years (d) 24 years
compounded annually at 10% rate of Answer:
interest [Given: (1.1)10= 2.59374]. (c) CASE → I Let Principal (P) =100, T = 4
(a) Rs. 37,467 (b) Rs. 37,476 years
(c) Rs. 37,647 (d) Rs. 37,674 (A) =200 R = ?
R T
Answer: A = P (1 + )
100
(c) Given A(n, i) = Rs. 6,00,000 R 4
Annual Installment (A) = ? 200 = 100 (1 + )
100
R 10 R 4
R = 10% p.a. i = = = 0.1 200 = (1 + )
100 100 100
n = 10 R
(1 + ) = 21/4
Future value 100
A CASE → II Let P =100, A = 3,200
A(n, i) = [(1 + i)n - 1] R
i
A (1 + ) = 21/4, T=?
100
6,00,000 = [(1 + 0.1)10 - 1] T
0.1 R
6,00,000 × 0.1 = A [(1.1)10 - 1] A = P (1 + )
100
60,000 = A [2.59374 - 1] R T
3.200 = 100 (1 + )
60,000 = A × 1.59374 100
3,200 R T
60,000
A= = (1 + )
1.59374 100 100
A = 37,647 32 = (21/4)T
T
25 = 2 4
T
=5 =
4
=T = 20 years
Chap. 5 Time Value of Money 130

15. A certain sum of money was invested at A = 300

simple rate of interest for three years. If the S.I. =300 - 100 = 200
S.I.× 100
same has been invested at a rate that was T=
P×R
seven percent higher, the interest amount 2 200 × 100 8
=
would have been Rs. 882 more. The amount 100 × 12.5

of sum invested is: =2×8

(a) Rs. 12,600 (b) Rs. 6,800 = 16 yrs.
(c) Rs. 4,200 (d) Rs. 2,800
Answer: 17. A sum of Rs. 44,000 is divided into three
(a) Let certain sum (P1) = P2 = P parts such that the corresponding interest
CASE → 1 earned after 2 years, 3 years and 6 years
Principal (P1) = P may be equal. If the rates of simple interest
(R1) = R% are 6% p.a., 8% p.a. and 6% p.a. respectively,
P 1 R1 T 1 then the smallest part of the sum will be:
(S.I.)1 =
100 (a) Rs. 4,000 (b) Rs. 8,000
T1 = 3 yrs
(c) Rs. 10,000 (d) Rs. 12,000
PR3
= Answer:
100
CASE → 2 (b) Total Sum = Rs. 44,000.
Principal (P2) = P Let Ist part = Rs. x
P 2 R2 T 2 IInd part = Rs. y
(R2) = (R + 7)% (S.I.)2 =
100
lllrdpart = Rs.z
(T2) = 3 yrs =
P(R+7)3 Case -1 Principal (P1) = Rs. x
100 Rate (R1) = 6% p.a.
Given, (S.I.)2 - (S.I.)1 = 882 (T1) = 2 yrs.
P(R+7)3 PR3 P 1 R1 T 1
- = 882 (S.I.)1 =
100 100 100
3PR + 21P − 3PR x×6×2
= 882 (S.I.)1 =
100 100
21P = 882 × 100 (S.I.)1 =
12x
882 × 100 100
P= Case - 2 Principal (P2) = Rs. y
21
P = 42 × 100 (R2) = 8% p.a.
P = 4,200 (T2) = 3 yrs.
P 2 R2 T 2 y×8×3
(S.I.)2 = =
100 100
June-2015 24y
(S.I.)2 =
100

16. A sum of money doubles itself in 8 years at Case - 3 Principal (P3)= Rs. z
simple interest. R3 = 6% p.a.
The number of years it would triple itself is T3 = 6 yrs. .
P 3 R3 T 3 z×6×6
__________. (S.I.)3 = =
100 100
(a) 20 years (b) 12 years (S.I.)3 =
36z
100
(c) 16 years (d)None
Given: (S.I.)1 = (S.I.)2 = (S.I.)3
Answer:
12x 24y 36z
(c) Case - 1 = =
100 100 100
Let P =100 A =200
or x = 2y = 3z = k (let)
S.I. = A – P x = k,2 y = k, 3z = k
= 200 – 100
y = k/2 z = k/3
= 100 k k k
S.I.× 100 x : y: z = : :
R= 1 2 3
P×T k k
100 × 100 = 6k : 6× : 6×
= 2 3
100 × 8
=6:3:2
R = 12.5%. 2
Smallest Sum = × 44,000
Case - 2 6+3+2

P = 100, R = 12.5%
Chap. 5 Time Value of Money 131

2
= × 44,000 T = 2 years , R = 10% p.a.
11
S.I. = Rs.90
= 8,000
S.I.×100 90×100
P= = = Rs. 450
R×T 10×2
December-2015 Now
R T
C.I. = P [(1 + ) − 1]
100
18. Suppose your parent decides to open a PPF 2
10
(Public Provident Fund) account in a bank = 450 [(1 + ) − 1]
100
towards your name with Rs. 10,000 every
= 450 [(1 + 0.1)2 - 1]
year starting from today for next 15 years.
= 450 × [(1.1)2 - 1]
When you receive and get 8.5% per annum
= 450 × (1.21 - 1)
interest rate compounded annually. What is
= 450 × 0.21
the present value of this annuity? (Give
= 94.50
answer in Rs. without any fraction.)
(Given P (15,0.085) = 8.304236576)
June-2016
(a) 83,042 (b) 1,66,084
(c) 93,042 (d) 8,30,423
21. Mr. X bought an electronic item for Rs.
Answer:
1,000. What would be the future value of the
(c) Annual installment (A) = Rs. 10,000
same item after 2 years, if the value is
n =15 years
compounded semiannually at 22% per
R = 8.5% p.a.
8.5 annum?
i= = 0.085 (a) Rs. 1488.40 (b) Rs. 1518.07
100
Present value = A. P(n, i) + A (c) Rs. 2008.07 (d) Rs. 2200.00
=10,000.P (15, 0.085) + 10,000 Answer:
= 10,000 × 8.304236576 + 10,000 (b) Principal (P) = 1000
= 83042.36576 + 10,000 R=
22
% = 11%
2
= 93,042
T = 2 × 2 = 4 half yearly
19. In how many years will a sum of money R T
become four times at 12% p.a. simple Future value A = P(1 + )
100
interest? 11 4
= 1000(1 + )
(a) 18 years (b) 21 years 100

(c) 25 years (d) 28 years = 1000(1 + 0.11)4

Answer: = 1000 (1.11)4
(c) Let Principal P =100 = 1518.07
A = 400 22. If an amount is kept at simple interest, it
S.I.= A – P earns an interest of Rs. 600 in first two years
= 400 – 100 but when kept at compound interest it earns
= 300 an interest of Rs. 660 for the same period,
R - 12%, T=? then the rate of interest and principal
PRT amount respectively are:
S.I. =
100 (a) 20%, Rs. 1,200
S.I.× 100 300 × 100
T= = = 25 years (b) 10%, Rs. 1,200
PR 100 × 12
(c) 2Q%, Rs. 1,500
20. The simple interest for a certain sum for 2 (d) 10%, Rs. 1,500
years at 10% per annum is Rs. 90. The Answer:
corresponding compound interest is (In (c) For 2 years
Rs.): S.I. = 600 and C.I. = 660
PRT
(a) 99 (b) 95.60 S.I. =
100
(c) 94.50 (d) 108 PR × 2
600 =
Answer: 100
600 × 100
(c) Let Principal (P) = Rs. x PR =
2
Chap. 5 Time Value of Money 132

30000
PR = 30000 ⇒ P = ______(1) (c) Given C.I. - S.I. =30
R
R T T = 2 years R = 5%
C.I. = P [(1 + ) − 1] R 2
100 C.I. - S.I = P ( )
100
30000 R 2 2
660 = [(1 + ) − 12 ] 30 = P (
5
)
R 100 100
30000 R R 30 = P(0.05)2
660 = [(1 + + 1) (1 +
R 100 100 30 = P (0.0025)
30
− 1)] P= = Rs. 12,000
0.0025
30000 R R
660 = [(2 + )( )]
R 100 100 25. A person lends Rs. 6,000 for 4 years and Rs.
200 + R 1 8,000 for 3 years at simple interest. If he
660 = 30000 ( )⋅
100 100 gets Rs. 2,400 as total interest, the rate of
660 × 100 × 100 = 30000 (200 + R) interest is:
660 × 100 × 300
200 + R = (a) 5% (b) 4%
30000
200 + R = 220 (c) 6% (d) 7%
R = 20% Answer:
R = 20% in equation (1) (a) Given P1 Rs. 6,000 P2 = Rs. 8,000, Total
P=
30000
= 1500 S.I. = 2,400
20
R1 = R% R2 = R%
T1 = 4 years, T2 = 3years
December-2016
Total Interest = (S.I)1 + (S.I)2
P1 R1 T1 P2 R 2 T2
23. The sum invested at 4% per annum 2,400 = +
100 100
compounded Semiannually amounts to Rs. 6,000 × R × 4 8,000 × R × 3
7,803 at the end of one year, is: 2,400 = +
100 100
(a) Rs. 7,000 (b) Rs. 7,500 2,400 = 240R + 240R
(c) Rs. 7,225 (d) Rs. 8,000 2,400
2,400 = 480R → R = = 5%
Answer: 480
(b) Let, sum (Principal)
P = Rs. x T = 1 year June-2017
R = 4% p.a. C.I.
A = Rs. 7,803 26. The future value of an annuity of Rs. 1,500
Interest is compounded half yearly (Semi made annually for five years at interest rate
Annually) 10% compounded annually is (Given that
then R = % = 2%
4 (1.1)5 = 1.61051):
2
(a) Rs. 9517.56 (b) Rs. 9157.65
T = 1 × 2 = 2 half yearly
(c) Rs. 9715.56 (d) Rs. 9175.65
Amount after T years
T Answer:
R
A = P (1 + ) (b) Annual Installment (Annuity) A = Rs.
100
2 2 1,500
7,803 = x (1 + )
100 n=5
7,803 = x (1.02)2 R =10%
7,803 = x × 1.0404 10
7,803
i= = 0.10
100
x= = 7,500 A
1.0404
Future Value A(n, i) = [(1 + i)n - 1]
Sum = 7,500 i
1,500
24. A compound interest on a sum for 2 years is = [(1 + 0.10)5 - 1]
0.10
1,50,000
Rs. 30 more than the simple interest at the = [(1 + 0.10)5 - 1]
10
rate of 5% per annum then the sum is: = 15,000 [(1.1)5 - 1]
(a) Rs. 11,000 (b) Rs. 13,000 = 15,000 × [1.61051 - 1]
(c) Rs. 12,000 (d) Rs. 15,000 = 15,000 × 0.61051
Answer: = 9,157.65
Chap. 5 Time Value of Money 133

27. The difference between the Compound 28. How much amount is required to be
interest and Simple interest at 10% per invested every year as to accumulate Rs.
annum for 4 years on Rs. 10,000 is Rs. 7,96,870 at the end of 10 years, if interest
_________. compounded annually at 10% given that
(a) 650 (b) 640 A(10, 0.1) = 15.9374?
(c) 641 (d) 600 (a) Rs. 40,000 (b) Rs. 4,50,000
Answer: (c) Rs. 48,000 (d) Rs. 50,000
(c) Principal (P) = 10,000, Rate (R) = 10%, Answer:
T = 4 years For S. I (d) Future Value A(n, i),= 7,96,870
PRT 10,000 × 10 × 4 n = 10, ’ R = 10%
S.I. = = = 4,000
100 100 10
For C.I i= = 0.1
100
R T Future Value
C.I = P [(1 + ) − 1] A
100
4
A(n, i) = (1 + i)n – 1]
10 i
= 10,000 [(1 + ) − 1] = 10,000 [(1 - A
100 7,96,870 = [(1 +0.1)10 - 1]
0.1
1)4 - 1] A
7,96,870= [(1 - 1)10 - 1]
= 10,000(1.4641 - 1) 0.1

= 10,000 × 0.4641 = 4,641

C.I - S.I = 4,641 - 4,000 = 641
Chap. 5 Time Value of Money 134

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