Financial MatheMatics

class 12

Two Mark
1. ₹ 2,50,000 cash is equivalent to a perpetuity of ₹ 7,500 payable at the end of each quarter. What is the
rate of interest convertible quarterly? Answer: 12

2. Mitul invested ₹ 3,50,000 in a fund. At the end of the year the value of the fund is ₹ 4,37,500. What is
the nominal rate of interest, if the market price is same at the end of the year? Answer: 25%

3. Find the present value of a sequence of payments of ₹ 1000 made at the end of every 6 months and
continuing forever, if money is worth 8% per annum compounded semi-annually. Answer: ₹ 25000

4. The value of a machine purchased two years ago, depreciates at the annual rate of 10%. If its present
value is ₹ 97,200, find.
(i) its value after 3 years; Answer: ₹ 70858.80
(ii) its value when it was purchased. Answer: 1,20,000
5. At what rate of interest will the present value of perpetuity of ₹ 1500 payable at the end of every 6
months be ₹ 20,000?
Ans: 15%

6. At 6% p.a., compounded quarterly, find the present value of a perpetuity of < 600 payable at the end of
each quarter.
Ans: ₹ 40000

7. Assume an investment’s starting value is ₹ 20,000 and it grows to ₹ 50,000 in 3 years. Calculate
CAGR (Compounded Annual Growth Rate) [Use: (2·5)1/3 = 1·355]
Ans: 35.5%
8. A man bought an item for ₹ 12,000. At the end of the year, he decided to sell it for ₹15,000. If the
inflation rate was 6%, find the nominal and real rate of return.
Ans: Nominal rate=25%; Real rate = 19%

Three Marks
1. Surjeet purchased a new house, costing ₹ 40,00,000 and made a certain amount of down payment so
that he can pay the balance by taking a home loan from XYZ Bank. If his equated monthly instalment
is ₹ 30,000, at 9% interest compounded monthly (reducing balance method) and payable for 25 years,
then what is the initial down payment made by him? [Use (1.0075) −300= 0.1062] Answer: 4,24,800

2. 10 years ago, Mr Mehra set up a sinking fund to save for his daughter’s higher studies. At the end
of 10 years, he has received an amount of ₹ 10,21,760. What amount did he put in the sinking fund
at the end of every 6 months for the tenure, which paid him 5% p.a. compounded semi-annually?
[Use (1.025)20= 1.6386] Answer: ₹ 40,000

3. An asset costs ₹ 1,00,000. Using linear depreciation method, find the annual depreciation of the asset
and construct a yearly depreciation schedule.
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 Answer: Annual Depreciation: ₹ 70,000

Years Book value at the Depreciation (in ₹) Book value at the

beginning of the year end of the year (in ₹)
(in ₹)
1 450000 70000 380000
2 380000 70000 310000
3 310000 70000 240000
4 240000 70000 170000
5 170000 70000 100000

4. Amrita bought a car worth ₹ 12,50,000 and makes a down payment of ₹ 3,00,000. The balance
amount is to be paid in 4 years by equal monthly instalments at an interest rate of 15% p.a. Find the
EMI that Amrita has to pay for the car. Answer: 26439.21
{Given (1·0125) 48 = 0·5508565}

5. Mr Surya borrowed a sum of ₹ 5,00,000 with total interest to be paid ₹ 2,00,000(flat) and he is paying
an EMI of ₹ 12,500. Calculate loan tenure.
Ans: 56 month

6. Mr Sharma wants to send his daughter abroad for higher studies after 10 years. He sets up a sinking
fund in order to have ₹ 500,000 after 10 years. How much should he set aside semi-annually into an
account paying 5% per annum compounded annually. [Use (1.025)20= 1.6386]
Ans: 19574.07

7. A recent accounting graduate opened a new business and installed a computer system that costs ₹
45,200. The computer system will be depreciated linearly over 3 years and will have a scrap value of ₹
0.
(i) What is the rate of depreciation?
Ans: 33.3%
(ii) Give a linear equation that describes the computer system’s book value at the end of tth year, where 0
≤ t ≤ 3.
−𝟒𝟓𝟐𝟎𝟎
Ans: v(t) = t+45200
𝟑
(iii) What will be the computer system’s book value at the end of the first year and a half?
𝟏 −𝟒𝟓𝟐𝟎𝟎 𝟑
Ans: v(𝟏 𝟐) = × 𝟐 + 45200 = ₹ 22600
𝟑

8. Find the effective rate which is equivalent to normal rate of 10% p.a. compounded:
(i) semi-annually.
Ans: 10.25%
(ii). quarterly.
Ans: 10.38%
[Given (1·05)2 = 1·1025, (1·025)4 = 1·1038]

9. A machine costing ₹ 2,00,000 has effective life of 7 years and its scrap value is ₹ 30,000. What amount
should the company put into a sinking fund earning 5% p.a. so that it can replace the machine after its
useful life? Assume that a new machine will cost ₹ 3,00,000 after 7 years.
[Given: (1.05)7 = 1.407]
Ans: ₹ 33,178
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10. The value of a car depreciates by 12.5% every year. By what percent will the value of the car
decrease after 3 years and after 5 years?
Ans: After 3 years, the value of the car will decrease by 33.01%; After 5 years, the value of the
car will decrease by 48.68%.

11. Mr Rohit invested ₹ 5000 in a fund at the beginning of year 2021 and by the end of year 2021 his
investment was worth ₹ 9000. Next year market crashed and he lost ₹ 3000 and ending up with ₹
6000 at the end of year 2022. Next year i.e. 2023 he gained ₹ 4500 and ending up with ₹ 10500 at the
end of the year. Find CAGR (Compounded Annual Growth Rate) of his investment.
(Use (2.1)1/3 =1.2805) Answer: 28.05%

Five Marks
1. Define Compound Annual Growth Rate (CAGR) and give the formula for investment given below:
Vikas invested ₹ 10,000 in a stock of a company for 6 years. The value of his investment at the end of
each year is given below:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
₹ 11,000 ₹ 11,500 ₹ 11,650 ₹ 11,800 ₹ 12,200 ₹ 14,000
1/6
[Use (1·4) = 1·058] Answer: 5.8%
2. A company establishes a sinking fund to provide for the payment of ₹ 1,00,000 debt, maturing in 4
years. Contributions to the fund are to be made at the end of year. Find the amount of each annual
deposit if interest is 18% per annum. [ Use (1.18)4 = 1.9388] Answer: ₹ 19162.22

3. A firm bought a machinery for ₹ 7,40,000 on 1st April, 2020 and ₹ 60,000 is spent on its installation.
Its useful life is estimated to be of 5 years. Its scrap value at the end of 5 years is estimated to be ₹
40,000. Find the amount of annual depreciation and the rate of depreciation. Answer: 1,52000, 20%

4. A person takes a housing loan worth ₹ 10,00,000 at an interest rate of 6% p.a compounded monthly.
He decided to repay the loan by equal monthly instalments in 15 years. Calculate the EMI, using
(i) flat rate method, Answer: ₹10555.55
(ii) reducing balance method. Answer: ₹ 8438.57
[Given: (1.005)-180 = 0.4074824]

5. Amrita buys a car for which she makes a down payment of ₹ 2,50,000 and the balance is to be paid in
2 years by monthly instalments of ₹ 25,448 each. If the financer charges interest at the rate of 20% p.a,
61 −24
find the actual price of the car. [Given (60) = 0.67253] Ans: 7,50,000

6. Mahesh purchased a house from a company for ₹ 70,00,000 and made a down payment of ₹ 15,00,000.
He repays the balance in 25 years by monthly instalments at 9% p.a. compounded monthly.
(i) What is the amount of monthly payment?
Ans: ₹ 47,025.
(ii) What is the total interest payment?
Ans: ₹ 86,07,500.
[Given: (1.0075)–300 = 0.1062878338]

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7. In 4 years, a mobile costing ₹ 36,000 will have a salvage value of ₹ 7200. The following graph shows
the depreciation of a mobile’s value over 4 years.

A new mobile at that time (i.e., after 4 years) is expected to cost for ₹ 55,200. In order to provide funds
for the difference between the replacement cost and the salvage cost, a sinking fund is set up into
which equal payments are placed at the end of each year. If the fund earns interest at the rate 7%
compounded annually, how much should each payment be? Also find the amount of Annual
Depreciation of the mobile’s value over 4 years and find the rate of depreciation (under straight line
method). Use (1.07)4=1.3107.
Answer: Annual Dep: ₹ 7200; Rate: 25%

Case Study

1. In the year 2010, Mr. Aggarwal took a home loan of ₹ 30,00,000 from State Bank of India at 7·5%
p.a. compounded monthly for 20 years.
Based on the above information, answer the following questions:
(i) Determine the EMI. Answer: ₹ 24167.82
(ii) Find the principal paid by Mr. Aggarwal in the 150th instalment. Answer: ₹ 13709.12
(iii) (a) Find the total interest paid by Mr. Aggarwal. Answer: ₹ 2800276.80

OR

(b) How much was paid by Mr. Aggarwal to repay the entire amount of home loan?
Answer: 5800276.8

[Use (1·00625)240 = 4·4608; (1·00625)91 = 1·7629]

2.
EQUATED MONTHLY INSTALMENTS (EMI): -

Each instalment can be considered as consisting of two parts:

(i) Interest on the outstanding loan (ii) Repayment of part of the loan.

Methods of calculation of EMI or Instalment: -

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 EMI or Instalment can be calculated by two methods:

1.Flat Rate Method

2. Reducing-balance method or Amortization of Loan

Rajesh purchased a house from a company for ₹2500000and made a down payment of ₹500000. He
repays the balance in 25 years by monthly instalments at the rate of 9% per annum compounded monthly.
((Given 1.0075)− 300 = 0.1062)

Based on the above information, answer the following questions:

(i) Find the number of payments and find the rate of interest per month. Ans: 300;0.0075
(ii) (a) What are the monthly payments of instalments using reducing balance method? Ans: 16782.27
OR
(ii) (b) What are the monthly payments of instalments using flat rate method? Ans: 21666.66
(iii) What is the total interest payment made in the process applied to calculate EMI in the above part
(37(ii))? Ans: ₹ 4499980

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