State whether each of the following statements is True (T) or False (F).

(i) Money has no time value

(ii) Investors do not have preference for present money
(iii) Interest factor helps in incorporating the time value of
money in financial analysis.
(iv) Time value of money is invariably considered in financial
decision making.
(v) Compounding and discounting techniques are same.
(vi) Cash flows occurring at different point of time are
comparable in absolute terms.
(vii) The present value of a future amount remains same
irrespective of the time of occurrence.
(viii) Present values and future values can be calculated only
with the help of relevant mathematical tables.
(ix) The discounting techniques help in finding out the
future value of a present amount.
(x) PVF(r,n) and PVAF(r,n) are same.
(xi) Implicit rate of interest can be found with the help of
compounding technique.
(xii) An annuity is an infinite series of cash flows.
(xiii) The number of cashflows in a perpetuity is known.
(xiv) “A bird in hand is worth two in the bush” correctly
presents the concept of time value of money.
(xv) Rate of interest and time period, both are required to
find out the present/future value.
[Answers : (i) F, (ii) F, (iii) T, (iv) F, (v) F, (vi) F, (vii) F, (viii) F, (ix)
F, (x) F, (xi) T, (xii) F, (xiii) F, (xiv) T, (xv) T.]

MCQ

1. Discounting technique is used to find out :

(a) Terminal Value
(b) Compounded Value
(c) Present Value
(d) Future Value.
2. The adjustment for time value of money is made through :
(a) Interest Rate
(b) Inflation Rate
(c) Growth Rate
(d) None of the above.
3. Equal Annual Cash Flows occurring at the end of each year for certain period are known as :
(a) Annuity
(b) Perpetuity
(c) Annuity Due
(d) Deferred Payments.
4. Equal annual amounts occurring in the beginning of certain years are known as :
(a) Annuity
(b) Perpetuity
(c) Annuity Due
(d) Deferred Payments.
5. Present Value of a future cash flow would decrease if :
(a) Discount Rate is reduced
(b) Discount Rate is increased
(c) Time Period is decreased
(d) All of the above.

6. Future cash flows are converted to present values, so that these can be :
(a) Aggregated
(b) Compared
(c) Used in Decision-making
(d) All of the above.
7. ‘Rule of 72’ is a short-cut method to estimate the :
(a) Present Values
(b) Compounding Effect
(c) Both (a) & (b)
(d) None of the above.
8. Effective Interest Rate is a factor of :
(a) Compounding Frequency
(b) Basic Rate of Interest
(c) Both (a) and (b)
(d) None of the above.
9. A series of Constant Cash flows occurring at regular intervals forever is known as :
(a) Growing Annuity
(b) Perpetuity
(c) Growing Perpetuity
(d) Annuity
10. Future Value and Present Value, both are based on :
(a) Number of Time periods
(b) Interest Rate
(c) Both (a) and (b)
(d) None of the above.

11. If the Interest Rate is greater than zero, which of the following series you would prefer to receive :
Year 1 Year 2 Year 3 Year 4
(a) Rs 500 Rs 400 Rs 300 Rs 200
(b) Rs 200 Rs 300 Rs 400 Rs 500
(c) Rs 350 Rs 350 Rs 350 Rs 350
(d) Any of the above as all are equal in total amount.
12. Time Value of Money is an important concept in finance
because it takes into account :
(a) Risk
(b) Time
(c) Compound Interest
(d) All of the above.
13. Which of the following is called an annuity :
(a) Lump Sum after few years
(b) A Series of Equal and Regular Amounts
(c) A Series of Unequal Amounts
(d) A Series of Equal and Irregular Amounts.
14. An investor wants to increase the Present Value. The rate
of discount applied for should be :
(a) Increased
(b) Decreased
(c) Any of (a) and (b)
(d) None of the above.
15. If n = 1 and Rate of interest > zero, which of the following
interest factor is equal to one :
(a) Present Value Factor
(b) Compound Value Factor
(c) Present Value Annuity Factor
(d) None of the above.
16. If Time is ‘n’, Rate of Interest is ‘k’ then (1 + k)n may be
called :
(a) Present Value Factor
(b) Compound Value Factor
(c) Compound Value Annuity Factor
(d) None of the above.
17. In a Loan Repayment Schedule, the interest amount paid
each period :
(a) Remained Constant
(b) Increases
(c) Decreases
(d) None of the above.
18. Future Value of an annuity is :
(a) Equal to Annuity Amount
(b) Less than Annuity Amount
(c) More than total of Annuity Amount
(d) None of the above.

19. Concept of Future Value and Present Value are :

(a) Proportionately related
(b) Inversely related
(c) Directly related
(d) Not related
20. If a student is awarded scholarship receivable over next
12 months, what calculation he should use to find out the
worth of scholarship today?
(a) Present Value of an Amount
(b) Future Value of an Amount
(c) Present Value of an Annuity
(d) Future Value of an Annuity
21. A student deposits some amount daily to accumulate
Rs 5,000 to pay his tuition fees after one year. Which of the
following compounding methods of interest should be
opted by him :
(a) Compounded Quarterly
(b) Compounded Daily
(c) Compounded Half-yearly
(d) Compounded Annually.
22. Which of the following is the highest value?
(a) Present Value of Rs 1,000 receivable after one year
(b) Total Value of Rs 1,000 deposited in Savings Bank
A/c for one year
(c) Rs 1,001
(d) Rs 1,000 deposited in Fixed Deposit @ 5.50% for one
year.
23. Present Value can be calculated with the help of formula :
(a) (1 + r)n
(b) 1/(1 + r)n
(c) (1 + r)n/1
(d) None of the above.
24. Present Value of a Rupee receivable after one year is :
(a) More than One Rupee
(b) Less than One Rupee
(c) Equal to One Rupee
(d) Equal to Future Value.
25. Future Value of One Rupee invested today is :
(a) More than One Rupee
(b) Equal to One Rupee
(c) Equal to Present Value
(d) Less than One Rupee.
[Answers : 1. (c), 2. (a), 3. (a), 4. (c), 5. (b), 6. (d), 7. (b), 8. (c), 9. (b),
10. (c), 11. (a), 12. (d), 13. (b), 14. (b), 15. (d), 16. (b), 17. (c), 18. (c),
19. (b), 20. (c), 21. (b), 22. (d), 23. (b), 24. (b), 25. (a)]

Indicate whether the following statements are True or False.

(i) Time value of money signifies that the value of a unit of money remains unchanged during
different time periods.
(ii) Time value of a unit of money is different over different periods on account of the reinvestment
opportunities with the firms.
(iii) Cash flows accruing to the firms at different time periods are directly comparable.
(iv) Either compounding or discounting technique can be used, to make heterogeneous cash flows
comparable.
(v) Effective and nominal rate of interest remain the same irrespective of the frequency of
compounding.
(vi) Effective rate of interest is positively correlated with frequency of compounding.
(vii) To arrive at the present value of cash flows, discounting is done at the rate which represents
opportunity cost of funds.
(viii) Present value tables for annuity can be directly applied to mixed stream of cash flows.
(ix) To facilitate comparison of cashflows that are occurring at different time periods, the technique
of either compounding all cash flows to the terminal year or discounting all cash flows to the
time zero period can be adopted.
[Answers: (i) False (ii) True (iii) False (iv) True (v) False
(vi) True (vii) True (viii) False (ix) True]

In the following multiple choice questions select the correct answers.

(i) Time value of money explains that
(a) a unit of money received today is worth more than a unit received in future (b) a unit of
money received today is worth less than a unit received in future (c) a unit of money received
today and at some other time in future is equal (d) none of them.
(ii) Time value of money facilitates comparison of cash flows occurring at different time periods
by
(a) compounding all cash flows to a common point of time (b) discounting all cash flows to
a common point of time (c) using either (a) or (b) (d) Neither (a) nor (b).
(iii) If the nominal rate of interest is 10 per cent per annum and frequency of compounding is 4
i.e. quarterly compounding, the effective rate of interest will be
(a) 10.25% per annum (b) 10.38% per annum (c) 10% per annum (d) none of them.
(iv) Relationship between annual effective rate of interest and annual nominal rate of interest is,
if frequency of compounding is more than 1,
(a) Effective Rate < Nominal rate (b) Effective Rate > Nominal rate (c) Effective Rate = Nominal
rate (d) None of these.
(v) If annual effective rate of interest is 10.25 % per annum and nominal rate of return is 10 per
cent per annum what is the frequency of compounding
(a) 1 (b) 3 (c) 2 (d) None of these.
(vi) A student takes a loan of Rs 50,000 from SBI. The rate of interest being charged by SBI is 10
per cent per annum. What would be the amount of equal annual instalment if he wishes to
pay it back in five instalments and first instalment he will pay at the end of year 5?
(a) Rs 11,000 (b) Rs19,310 (c) Rs 15,000 (d) None of these.
(vii) How much amount should an investor invest now in order to receive five annuities starting
from the end of this year of Rs 10,000 if the rate of interest offered by bank is 10 % per
annum?
(a) Rs 40,000 (b) Rs 45,000 (c) Rs 37,910 (d) none.
(viii) If, in case of question (vii), he wishes to receive Rs 10,000 forever, investment amount required
is
(a) Rs 75000 (b) cannot be determined (c) Rs 1,00,000 (d) none.

(ix) A company wants to retire a loan of Rs 5,00,000, 10 years from today. What amount should it
invest each year for 10 years if the funds can earn 8 per cent per annum. The first investment
will be made at the beginning of this year.
(a) Rs 50,000 (b) Rs 31,950 (c) Rs 40,000 (d) None of these.
[Answers: (i) a (ii) c (iii) b (iv) b (v) c (vi) b (vii) c (viii) c and (ix) b]
Example:
(i) Calculate the present value of Rs.600 (a) received one year from now; (b) received at the end of five
years; (c) received at the end of fifteen years. Assume a 5 per cent time preference rate.
(ii) Determine the present value of Rs.700 each paid at the end of each of the next six years. Assume
an 8 per cent of interest.
(iii) Assuming a 10 per cent discount rate, compute the present value of Rs.1,100; Rs.900; Rs.1,500
and Rs.700 received at the end of one through four years. use the tables.

Answer:
(i) Present value of Rs.600:
(a) The present value factor at 5 per cent for one year is: 0.952. Therefore, the present value of Rs.600
at the end of one year will be: Rs.600 × 0.952 = Rs.571.20.
(b) The present value factor at 5 per cent at the end of five years is: 0.784. Therefore, present value of
Rs.600 will be: Rs.600 × 0.784 = Rs.470.40.
(c) The present value factor at 5 per cent at the end of fifteen years is 0.481. Therefore, present value
of Rs.600 will be: Rs.600 × 0.481 = Rs.288.60.
(ii) As the present value of an annuity of Rs.700 has to be computed, Table D will be used. The present
value factor of an annuity of Rs.1 at 8 per cent for 6 years is 4.623. Therefore, the present value of an
annuity of Rs.700 will be: 4.623 × Rs.700 = Rs.3,236.10.
(iii) Table C will be used to compute the present value of the uneven series of cash flows. The
computation is shown as follows:
P = 1,100 X0.909 + 900X 0.826 + 1,500 X0.751+ 700X 0.683
= 999.90 + 743.40+ 1,126.50 + 478.10
= 3, 347.90

Example:
Exactly ten years from now Sri Chand will start receiving a pension of Rs 3,000 a year. The payment
will continue for sixteen years. How much is the pension worth now, if Sri Chand’s interest rate is 10
per cent?

Solution:
Sri Chand will receive first payment at the end of 10th year, and last payment at the end of 25th year.
That provides him 16 payments of pension money.

The discounted value of the annuity of Rs3,000 starting from the end of year 10 until the end of year
25 is the present value of pension received by Sri Chand.

The present value of pension will be equal to:

(9.077 – 5.759) ×Rs.3,000 = 3.318 × Rs3,000 = Rs9,954

Example:

Your father has promised to give you Rs. 100,000 in cash on your 25th birthday. Today is your 16th
birthday. He wants to know two things: (a) If he decides to make annual payments into a fund after one
year, how much will each have to be if the fund pays 8 per cent? (b) If he decides to invest a lump
sum in the account after one year and let it compound annually, how much will the lump sum be? (c) If
in (a) the payments are made in the beginning of the year, how much will be the value of annuity?
Assuming that interest is 8 per cent in each case. use the tables.

Solution:
Rs 100 000 = A( 12.488) , ( CVFA9,.08 = 12.488)

A = Rs 8007 .69

Example:
Assume that a Rs 20,00,000 plant expansion is to be financed as follows : The firm makes a 15% down
payment and borrows the remainder at 9% interest rate. The loan is to be repaid in 8 equal annual
instalments beginning 4 years from now. What is the size of the required annual loan payments?

Solution :
The firm borrows Rs 17,00,000 (85%). Compound interest occurs over the entire 11 years of the life of
the loan. In order to obtain the required annual loan payment, two additional points have to be
remembered : (1) the loan repayment will be computed by using a present-value annuity table; and (2)
the present value of an annuity located one year before the first payment.
To compute the size of the annual payment, first compute the amount owed at the end of year 3 (one
year before the first payment). By compounding Rs 17,00,000 for three years at 9%,

FV = PV(1 + r)n
FV = 1700000X(1+.09)3 = Rs 22,01,550

Now the FV becomes the present value of the 8-payment

annuity discounted at 9%. So, compute the equal yearly
payment.

PV = Annuity Amount × PVAF(r,n)

22,01,550 = Annuity Amount X (5.535)

Annuity Amount = Rs. 397750

Ref: Rustagi,R.P, Fundamentals of Financial Management

Pandey,I.M, Financial Management
Khan,M.Y, Jain ,P.K, Financial Management