Formulas:

= +
= +

= = ∗ +

= = ∗ = FV / +

= = ∗ ,

= = ∗ ,

+ −
= ∗ "

−$ %
+
= ∗# &

= ∗ ,

= ∗ ,

' (
= $ %

Doubling Period:

-.
1. Rule 72:
Problems on Time Value of Money:
1. Find out the present value of an investment which is expected to give a return of
Rs. 2500 p. a. indefinitely and the rate of interest is 12% p.a.

Answer:

' ( .677
= $ %=$ % = 9 . .7, :;;. ;;
7. .

2. What should Mr. Anil invest today if he wants to have a sum of Rs 8,00,000 after
4 years. His investment promises a return of 16% annually.

Answer:

= = ∗$ % = 8,00,000 ∗ $ %
+ + 7. > ?

= Rs 4,41,833

= = ∗ , = 8,00,000 ∗ 0.552

= Rs 4,41,600

Due to approximation different in answer.

BOTH ARE CORRECT.

3. Calculate the value of a deposit of Rs. 1,000; 2,500; and 6200; 5 years hence if the
interest rate is: a.8% b. 10%, c. 12%, d. 15%
Deposit amount = PV FVIF 10%, 5y FV
1,000 1.611 1611
2,500 1.611 4028
6200 1.611 9988

Deposit amount = PV FVIF 12%, 5y FV

1,000 1.762 1762
2,500 1.762 4405
6200 1.762 10924

Deposit amount = PV FVIF 15%, 5y FV

1,000 2.011 2011
2,500 2.011 5028
6200 2.011 12468

Deposit
FV 8%, 5y FV 10%, 5y FV 12%, 5y FV 15%, 5y
amount = PV
1,000 1469 1611 1611 2011
2,500 3673 4028 4028 5028
6200 9108 9988 9988 12468

4. If Rs. 2,000 is invested now at 10% per annum for 3 years what is the value at the
end of 3 years?
 5. What would be the total value of Rs. 5,000 invested now?
a. After 3 years, if the interest rate is 20% p. a.
b. After 4 years, if the interest rate is 15% p a

Answer:
c. After 3 years, if the interest rate is 6% p a

= = ∗ +

a. After 3 years, if the interest rate is 20% p. a.

= = ∗ , = 6777 ∗ . -.: = 9 :>?7

= = ∗ , = 6777 ∗ . -?B = 9 :-?6

b. After 4 years, if the interest rate is 15% p a

= = ∗ , = 6777 ∗ . B = 9 6B66
c. After 3 years, if the interest rate is 6% p a

6. Ken Investments is offering an investment plan which pays Rs 10,000 annually

for 8 years. An investor is looking the possibility of buying this plan, who desires
an annual rate of return at 14%. Calculate the present value and advice the
investor if the plan is priced at 45,000.

Answer:

C
= ∗ D
" r=0.14 n=8 years

= ∗ , = 7777 ∗ ?. >;B = 9 ?>;B7

 7. Madhura ltd creates a sinking fund to replace a machine. For this purpose, a
deposit of Rs. 20,000 is made on an annual basis for 6 years in an investment plan.
The plan fetches a return of 12%. Calculate the value of the sinking fund at the
end of 6 years.

Answer:
R= 0.12 , n = 6years
+ −
= ∗ "

= ∗ , = .7777 ∗ :. 6=9 >.;77

8. Aruna is promised Rs. 5,000 after 10 years in exchange of Rs. 1,000 today. What
is the interest rate in this deal?

PV = 1000
FV = 5000
N = 10
r=?

= = ∗ +

6777 = 777 ∗ + 7

6777
= + 7
777

6= + 7

FVIF = 5

√6 = + 6K = +
7
L
7
 = ∗ , = 777 ∗ ?. :7- = 9 ?:7-
Calculation of FV by assuming interest rate is 17%

= ∗ , = 777 ∗ 6. .;? = 9 6.;?

Calculation of FV by assuming interest rate is 18%

Interpolation method:

17% ? 18%
4807 5000 5234

+ST UVW
PQQ = RQQ + $ % ∗ XQ
+ST UVW + −ST UVW

Internal Rate of Return = Lower rate + NPV@LRR x ( HR – LR)

NPV@ LRR + NPV @ HRR

5000 − 4807
PQQ = 17 + $ % ∗ 18 − 17
5000 − 4807 + 5234 − 5000

193
PQQ = 17 + $ %∗1
193 + 234

193
 9. A company offers to refund an amount of Rs. 44,650 at the end of 5 years for a
deposit of Rs. 6,000 made annually. Find the implicit rate of interest offered by
the company.

+ −
= ∗ "

+ 6
−
??>67 = >777 ∗ "

+ 6
−
-. ?? >> = "

= ∗ ,
??>67 = >777 ∗ ,6Z

-. ?? >> = ,6Z

ONLY Trail & Error Method

Assuming 10% interest rate

= >777 ∗ 7%, 6Z = >777 ∗ >. 76 = 9 ;>>;

Assuming 15% interest rate

= >777 ∗ 6%, 6Z = >777 ∗ -. .B- = 9 ?;-:7

Assuming 20% interest rate

= >777 ∗ .7%, 6Z = >777 ∗ -. ??. = 9 ??>6.

 10. A company issues Debentures of Rs 10,000 paying Interest at 10% p.a. The
company redeems 20% of the face value of the Debenture every year at the end
of each year for the next 5 years. An Investor who has an expected rate of 12%
wants to buy the Debenture. Calculate the present value of the debenture for the
investors and also whether the Investor should buy the debenture if it is selling
at a discount of 25 % today.

ANS:

Face Value = Rs 10000

Interest rate = 10%
Redemption = 20% on face value each year
Time = 5 years

Investor expected return = 12%

Calculation of Total cash inflow

A B C D E F
Year Debenture Redemption Debenture Interest Total
at amount at ending @10% cash
beginning = (10000 *20%) of the year = (B * 10%) inflow =
of the year = (B – C) (C +E)
1 10000 2000 8000 1000 3000
2 8000 2000 6000 800 2800
3 6000 2000 4000 600 2600
4 4000 2000 2000 400 2400
5 2000 2000 0 200 2200

Calculation of Present value of the debenture @ 12%

Year Total cash inflow PVIF @ 12% PV of cash inflow

1 3000 0.893 2679
Practice Problems:
1. An investor deposits a sum of Rs.1,00,000 in a bank account on which interest is
credited @ 10% p.a. How much amount can be withdrawn annually for a period
of 15 years.
(Ans) – 13,148 Rs

2. What is the minimum amount which a person should be ready to accept today
from a debtor who otherwise has to pay a sum of Rs.5000 today, Rs.6000,
Rs.8000, Rs.9000 and Rs.10,000 at the end of year 1,2,3,4 respectively from today.
The rate of interest maybe taken at 14%.
(Ans) – Rs.28,409

3. What is the present worth of operating expenditure of Rs.1,00,000 per year which
are assumed to be incurred continuously throughout in 8 year period if the
effective annual rate of interest is 12%.
(Ans) – Rs.4,96,800

4. Ten years from now Mr.X will start receiving a pension of Rs.3000 a year. The
payment will continue for 16 years. How much is the pension worth now, if the
interest rate is 10%.
(Ans) – Rs.9952

5. A student is awarded a scholarship and two options are placed before him (i) to
receive Rs.1100 now or (ii) receive Rs.100 p.m at the end of each of next 12
months. Which option be chosen if the rate of interest is 12%.
(Ans) – Rs.1125.50

Answers for Problems on Time Value of Money

1. 2,083.33
2. Rs. 4,41,600
3.
8% 10% 12% 15%
Rs. 1000 1469 1611 1762 2011
Rs. 2500 3673 4026 4406 5028