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Time Value of Money Questions

The document outlines various financial scenarios involving sinking funds, loans, present value calculations, and annuities. It includes calculations for annual contributions to retire debentures, loan installments, present value of cash inflows, and future value of investments. Additionally, it addresses interest rates, growth rates, and payment structures for different financial instruments.

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itsvijaylaxmi9625
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20 views2 pages

Time Value of Money Questions

The document outlines various financial scenarios involving sinking funds, loans, present value calculations, and annuities. It includes calculations for annual contributions to retire debentures, loan installments, present value of cash inflows, and future value of investments. Additionally, it addresses interest rates, growth rates, and payment structures for different financial instruments.

Uploaded by

itsvijaylaxmi9625
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Company XYZ is establishing a sinking fund to retire Rs.

5,00,000, 8 per cent debentures, 10


years from today. The company plans to put a fixed amount into the fund each year for 10
years. The first payment will be made at the end of the current year. The company anticipates
that the funds will earn 6 per cent a year. What equal annual contributions must be made to
accumulate Rs 5,00,000, 10 years from now?

2. A limited company borrows from a commercial bank Rs 10,00,000 at 12 per cent rate of
interest to be paid
in equal annual end-of-year installments. What would the size of the installment be? Assume
the repayment period is 5 years.

3.

4. If ABC company expects cash inflows from its investment proposal it has undertaken in time
period zero,
Rs 2,00,000 and Rs 1,50,000 for the first two years respectively and then expects annuity
payment of Rs 1,00,000 for the next eight years, what would be the present value of cash
inflows, assuming a 10 per cent rate of interest?

5. Suppose a particular debenture pays interest at 8 per cent per annum. The debenture is to be
paid after 10
years at a premium of 5 per cent. The face value of the debenture is Rs 1,000. Interest is paid
after every
six months. What is the current worth of the debenture, assuming the appropriate market
discount rate on
debentures of similar risk and maturity is equal to the debenture’s coupon rate, that is, 8 per
cent?

6. Calculate the present value of `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 `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 `1,100; `900; `1,500 and `700 received at the end of one through four years.

7. Your father has promised to give you `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.

8. XYZ Bank pays 12 per cent and compounds interest quarterly. If `1,000 is deposited initially, how
much shall it grow at the end of 5 years?
9. How long will it take to double your money if it grows at 12 per cent annually?

10. Mohan bought a share 15 years ago for `10. It is now selling for `27.60. What is the compound
growth rate in the price of the share?

11. Sadhulal Bhai is borrowing `50,000 to buy a low-income group house. If he pays equal
installments for 25 years and 4 per cent interest on outstanding balance, what is the amount of
installment? What shall be amount of instalment if quarterly payments are required to be
made?

12. A company has issued debentures of `50 lakh to be repaid after 7 years. How much should the
company invest in a sinking fund earning 12 per cent in order to be able to repay debentures?

13.A bank has offered to you an annuity of `1,800 for 10 years if you invest `12,000 today. What rate
of return would you earn?

14.A firm purchases a machinery for `800,000 by making a down payment of `150,000 and
remainder in equal installments of `150,000 for six years. What is the rate of interest to the firm?

15. AB Limited is creating a sinking fund to redeem its preference capital of `5 lakh issued on 6 April
2004 and maturing on 5 April 2015. The first annual payment will be made on 6 April 2004. The
company will make equal annual payments and expects that the fund will earn 12 per cent per year.
How much will be the amount of sinking fund payment?

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