DEPARTMENT OF HUMANITIES AND SOCIAL SCIENCES

INDIAN INSTITUTE OF TECHNOLOGY KHARAGPUR

FINANCIAL ANALYSIS LABORATORY: EM39202

1. (A) How much money an individual need to invest today so that he will receive Rs.11,424
next year if the rate of interest is 12%?
(B) How large a lump sum of money would an individual need to invest at an annual rate of
interest of 10 percent, compounded annually, in order to have $30,000 at the end of six years?
2. (A) Smith wants to determine the present value of cash flows consisting of Rs. 1,000 per
year for 5 years at 10% rate of interest?
(B) What is the present value of a series of monthly payments of $200 made at the end of each
month for the next five years? Assume that the discount rate is 5 percent per year, compounded
monthly.
(C) What would be the present value of the monthly payments in problem 2(B) if the payments
were made at the beginning of each month rather than the end?
3. Find the present value of the following series yearly payments if the time value of money is
10%?
Year Cash Flow
1 500
2 1000
3 1500
4 2000
5 2500

4. TCS expects to receive Rs. 1,00,000 for a period of 10 years from a new project it has just
undertaken. Assuming a 10% rate of interest, calculate the PV of this cash flows?
5. Calculate the present value of Rs. 1000 to be received after 15 years if the interest rate is 8
percent.
6. Calculate the present value of Rs.1000 to be received after 20 years if the interest rate is 12
percent.
7. Suppose an investment that promises to pay $10,000 in one year is offered for sale for
$9,500. Your interest rate is 5%. Should you buy?
8. Value an investment that promises $100 per year for next 5 years at an annual interest rate
of 10% is being sold to you at a cost of $400. Would you buy this investment?
9. Suppose you are given the following three cash inflows from which you have to choose one
alternative. Which alternative would you choose if the discount rate of money was 6 percent,
and why?
 Alternative A Year-end receipts of $7,000 for each of the next four years
Alternative B A single, lump-sum receipt of $31,000 at the end of four years
Alternative C Year-end receipts of $2,600 for each of the next four years plus a lump-
sum receipt of $20,000 at the end of four years

10. You are evaluating an income property that is providing increasing rents. Net rent is
received at the end of each year. The first year's rent is expected to be $8,500 and rent is
expected to increase 7% each year. Each payment occur at the end of the year. What is the
present value of the estimated income stream over the first 5 years if the discount rate is 12%?
11. A firm is expected to generate net cash flows (cash inflows minus cash outflows) of $5,000
in the first year and $2,000 for each of the next five years. The firm can be sold for $10,000
seven years from now. The owners of the firm would like to be able to make 10 percent on
their investment in the firm. What is the value of the firm? Suppose you have the opportunity
to acquire the firm for $12,000. Should you acquire the firm?
12. Suppose you can buy a security at a price of $78.35, and it will pay you $100 after five
years. Calculate the discount rate of return on this security?
13. Suppose you invest $78.35 at an interest rate of 5 percent per year. How long will it take
your investment to grow to $100?
14. The Morgan Company plans to borrow money to purchase an office building for its
headquarters. The building it has selected has a price tag of $10 million. The company will
make a down payment of $2 million and take a first mortgage on the balance of $8 million.
The lender agrees to provide a 30-year mortgage on the principal of $8 million at an annual
interest rate of 10 percent, compounded monthly, with monthly payments at the end of each
month. How much will Morgan pay monthly on their mortgage?
15. To save for a new computer system that will be purchased two years from the present, the
financial manager of ABC Services wants to put aside monthly amounts into a bank account
that pays a nominal annual rate of interest of 6 percent, compounded monthly. The deposits
will be made at the beginning of each month, and the new computer system will cost $20,000
when it is purchased two years from the present. What should be the amount of the monthly
deposits?
16. To save for a new computer system that will be purchased two years from the present, the
financial manager of ABC Services wants to put aside monthly amounts into a bank account
that pays a nominal annual rate of interest of 6 percent, compounded monthly. The deposits
will be made at the end of each month, and the new computer system will cost $20,000 when
it is purchased two years from the present. What should be the amount of the monthly deposits?
17. (A) A sum of $30,000 is invested at an annual rate of interest of 10 percent, compounded
annually. What is the future value of the investment at the end of six years—that is, six years
after making the investment?
(B) The CFO of the Baker Company invests $10,000 at the end of each month into a sinking
fund to accumulate capital for new equipment that will be purchased at the end of two years.
The money invested will earn interest at a 5 percent annual rate, compounded monthly. How
much will be available in the sinking fund at the end of two years?
18. Suppose the monthly payments of $10,000 [see preceding example 17(B)] are made at the
beginning of each month instead of at the end. How would this affect the answer to Example
17 B?
19. Suppose that in addition to depositing $10,000 at the end of each month into a sinking fund
(see Example 17 B), the CFO of the Baker Company begins with an initial deposit of $200,000
at the beginning of the first month. How would this affect the answer to Example 17 B?
20. Refer to the conditions for Example 19. How much would the CFO of the Baker Company
have to deposit at the end of each month for two years (in addition to the initial deposit of
$200,000) for the sinking fund to have a future value of $500,000?
21. (A) If the Morgan Company pays off its $8 million mortgage by monthly payments of
$70,205.73 (see Example 14) at the end of each month for 30 years, how much interest will the
company pay for the first and last months of the mortgage?
(B) Suppose that a firm has borrowed $10,000 at a 5% interest rate from a bank to purchase a
fixed asset. For simplicity, we will assume that the bank allows the firm to make annual
payments and that the loan will be repaid over five years. Prepare a loan amortization schedule.
22. (A) The CFO of the Morgan Company (see Example 21 A) wants to know how much
interest the company will pay on its $8 million mortgage during the first year of the mortgage,
and how much the company will pay toward reducing the principal during the first year.
(B) For planning purposes, the CFO of the Morgan Company (see preceding example, 22 A)
needs a table and chart that show how the annual payments to interest and to principal change
during each of the 30 years of the mortgage.
23. Case Study:
Iverson’s Home Mortgage Mr. and Mrs. Iverson have applied for a mortgage loan on a new
home. The new home has a price of $250,000. The Iversons will make a down payment of
$50,000 and take a 30-year mortgage on the balance. The mortgage company will charge a
nominal annual interest rate of 9 percent, compounded monthly.
a. What will be the month-end mortgage payments the Iversons will pay?
b. The loan is made July 1, and the Iversons will make their first month-end payment at the end
of July. When computing their taxable income, the Iversons can deduct the interest they paid
on their mortgage during the calendar year for which they file their income tax. If the Iversons
continue to make their monthly payments by the end of each month, how much interest will be
a deductible expense on their income tax for the calendar year in which they took out their
home mortgage? (Note that the first calendar year of the mortgage is from July to December;
that is, from months one to six of the mortgage.) How much interest will be a deductible
expense for the next year after that? How much interest will they be able to deduct as an
allowable expense for the second calendar year.
c. What would be the total amount of interest the Iversons would pay if their mortgage
continued in effect for the entire 30 years?
d. Suppose that at the end of three years (i.e., 36 months) from the time they took out the
mortgage, the financial conditions of the Iversons have improved and interest rates have
declined. The Iversons then wish to consider paying off the remaining balance due on their
mortgage with a new mortgage having a life of 20 years. The new 20-year mortgage the
Iversons will take out to replace their original mortgage has a nominal annual interest rate of 8
percent, compounded monthly. What will be the principal of the new mortgage and the
Iversons’ monthly payments on it?
e. At the end of an additional five years after taking out the new mortgage (i.e., a total of eight
years from their original home mortgage), the Iversons have added to their family and need a
larger home. As part of the transactions for buying the new home, they need to pay off the
balance due on the mortgage for their old home. How much will be the unpaid balance of their
mortgage on their old home at this point?
f. What will be the market value of the home at the time of sale (i.e., eight years from its
purchase) if its market value appreciates at a rate of 3.5 percent per year over the eight years
that the Iversons have owned the home? Assuming that the Iverson’s pay a fee of 6 percent of
the selling price, and the selling price is the same as the market value at the time of sale, how
much will the Iversons receive from the sale of their home after paying the selling expenses
and paying off the balance due on the mortgage?
g. Create a one-variable input table that shows the effect of the rate of appreciation for the
market value of the Iversons’ home on the net proceeds they will receive from the sale of their
home after paying the 6 percent sellers fee and the unpaid balance of their mortgage. Use
appreciation rates of 2, 3, 4, and 5 percent.
h. Create a two-variable input table that shows the effect of changes in the rate of appreciation
for the market value of the Iversons’ home and the rate of interest for their 20-year mortgage
on the net proceeds they will receive from the sale of their home. Use appreciation rates of 2,
3, 4, and 5 percent and mortgage rates of interest of 6, 7, 8, 9, and 10 percent.
24. Suppose you are given the following three cash inflows from which you have to choose
one alternative. Which alternative would you choose if the discount rate of money was 6
percent, and why?
Alternative A Year-end receipts of $7,000 for each of the next four years
Alternative B A single, lump-sum receipt of $31,000 at the end of four years
Alternative C Year-end receipts of $2,600 for each of the next four years plus a lump-
sum receipt of $20,000 at the end of four years

(i) At what discount rate are the present values of the future cash flows of Alternatives A and
C equal? What is the present value of the future cash flows of Alternative B at the same discount
rate?
(ii) Evaluate the effect of changes in the discount rate of money from 0% to 12% on the present
values of the three future cash inflows of Example 1(i). Use increments of 1% in the discount
rate, and indicate which alternative is the best choice at each discount rate.