Chapter 3 Time Value of Money - Practice Problems

Chapter 3
THE TIME VALUE OF MONEY

PROBLEMS FOR PRACTICE
Problem
Q 1. Calculate the value 3 years hence of a
deposit of Rs.5,800 made today if the interest
rate is 12 percent
 FV = 5,800 x FVIF (12%, 3 years)

= 5,800 x (1+0.12)^3 =Rs.8,149
Problem
Q2. If you deposit Rs.2,000 today at 6 percent rate of interest
in how many years (roughly) will this amount grow to
Rs.32,000 ? Work this problem using the rule of 72
Solution: Rs.32,000 / Rs. 2,000 = 16 = 2^4
According to the Rule of 72 at 6 percent interest rate
doubling takes place approximately in 72 / 6 = 12 years
So Rs.2,000 will grow to Rs.32,000 in approximately
4 x 12 years = 48 years
Problem
Q3. Futura Ltd has an obligation to redeem Rs 500
million bonds 6 years hence. How much should the
company deposit annually in a sinking fund account
wherein it earns 14 % interest to cumulate Rs 500
million in 6 years time?
500 million / {[ ( 1.14) 6 – 1] / 0.14 } = Rs 58.578 million

Problem
Q4. Loan = 10,00,000, Interest = 1% p.m, Repayment period =
180 months
Calculate EMI
1000000 = A [ ( 1+0.01)180 - 1 ] = 12002

0.01 ( 1+0.01 )180
Problem
Q5. You can afford to pay Rs 12,000 per month for 3
years towards a new car. You call a finance company
and learn that the rate of interest on car finance is 1.5
% pm for 36 months. How much can you borrow ?
PVA = 12000 * [( 1 + 0.015 ) 36 - 1]

0.015 * ( 1 + 0.015 ) 36
= Rs 331928
Problem
Q6. A finance company advertises that it will pay a
lump sum of Rs 8,000 at the end of 6 years to investors
who deposit annually Rs 1000 for 6 years. What interest
rate is implicit in this offer ?
8,000 = 1000 [ ( 1 + r )6 – 1 ] / r = 11.43 %

Problem
Q7. The treasurer of ABC Imports expects to invest $50,000 of the firm's funds in a
long-term investment vehicle at the beginning of each year for the next five years.
He expects that the company will earn 6% interest that will compound annually.
What would be the value of these payments at the end of the five-year period?
 FV of annuity due = ($50,000(1 + .06) [(1 + .06)^5] - 1) / .06)
= $298,765.90
Problem
Q8. Suppose you have decided to deposit Rs.30,000 per
year in your Public Provident Fund Account for 30
years. What will be the accumulated amount in your
Public Provident Fund Account at the end of 30 years if
the interest rate is 11 percent?
FVA = 30000 *[ ( 1 + 0.11 )30 – 1 ] / 0.11 = Rs 59,70,626.338

Problem
Q9. You want to take a trip to the moon which costs Rs
10,00,000 .The cost is expected to remain unchanged in
nominal terms. You can save annually Rs 50,000 to
fulfill your desire. How long will you have to wait if your
savings earn an interest of 12 % p.a
10,00,000 = 50,000 x [ ( 1 + 0.12 )n – 1 ] / 0.12 =10.79 years
You will have to wait for about 11 years.

Problem
Q10. Your company has entered a lease
requiring four annual payments of $10 million in
advance. The lease rate is 10%. What is the PV
of the lease ?
PV( annuity due) = 10 [ ( 1+0.1 ) (4 - 1) - 1 ] + 10

0.1( 1+ 0.1) (4- 1)
= $ 34.87 million
Problem
Q11. You want to borrow Rs 10,80,000 to buy a flat. You
approach a housing finance company which charges 12 %
interest p.a . You can pay Rs 1,80,000 per year towards loan
amortization. What should be the maturity period of the loan?
1080000 = 180000 * [ ( 1 + 0.12 ) n – 1 ]

0.12*( 1 + 0.12 ) n
N= 11.23 years
Problem
Q12. A firm deposits Rs 50 lakh at the rate of 8%
interest and compounding is done on quarterly
basis. What is the compound value at the end of
the 4th year.
FV = 5000000[ 1+0.08/4]^4*4
Rs 68,63,928
Problem
Q13. From the following dividend data of a
company calculate the compound rate of growth
for the period 2013-2018.
Year 2013 2014 2015 2016 2017 2018
Dividend 21 22 25 26 28 31
per share
(in Rs)
31 = 21 ( 1+ r)^5 ; r = 8 .1 %
Problem
Q 14. Star realty agency wishes to rent out one apartment for 5 years
at an annual rent of Rs 6,00,000 with the stipulation that rent will
increase by 5 % in every year. If the agency’s required rate of return is
14% , how much should Star Realty Agency invest in the apartment ?
 PV = 6,00,000 ( 1 + 0.05 ) [ 1- ( 1 + 0.05 ) 5]

( 1 + 0.14 )5
0.14 – 0.05
= Rs 2359975.45
Problem
Q15. Mr Ram deposited Rs 1,000 in a bank at
10% rate of interest with quarterly
compounding. He wants to know the effective
rate of interest.
 ERI = [1+0.10/4]^4 -1
= 10.3%
Problem
Q16. Mr Ashok , an investor expects a perpetual
amount of Rs 1,000 annually from his
investment. What should be the amount of his
investment if the interest rate is 8 %?
 PV of perpetuity = 1000/0.08 = Rs 12,500

Problem
Q17. Assuming a loan as Rs 1,00,000 at 9% interest p.a
repayable in15 years. Determine the Annual instalment.
100000 = A * [( 1 + 0.09 ) 15 - 1]
0.09 * ( 1 + 0.09 ) 15
A = Rs 12405.88
Problem
Q18. Baldev opened a savings account and
deposited $250 as principal. The account earns
6% interest compounded continuously. What is
the Balance in Baldev’s account after 5 years ?
• FV = 250*2.71830.06*5
= $ 337.46
Problem
Q 19. A 12 payment annuity of Rs 10,000 will begin 8
years hence. The first payment occurs at the end of 8
years. What is the present value of this annuity if the
discount rate is 14 %?
Beg of 8th year

PVA =10000[1.1412 -1 ]/ (0.14*1.1412) = Rs56602.92
Beg of 1st Year
PV = 56602.92/(1.147) =22620.27
Problem
Q 20. You can invest today in a financial instrument that
will pay you $40 every year starting at the end of this
year for the next five years and $1,000 at the end of the
five years. If you require a 12% return, how much
should you be willing to pay for this instrument?
[ ]
1
1−
( 1+0.12 ) 5 $ 1 , 000
PV 0=$ 40 + =$ 711.62
0.12 ( 1+0.12 ) 5

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Chapter 3

THE TIME VALUE OF MONEY

 FV = 5,800 x FVIF (12%, 3 years)

500 million / {[ ( 1.14) 6 – 1] / 0.14 } = Rs 58.578 million

1000000 = A [ ( 1+0.01)180 - 1 ] = 12002

PVA = 12000 * [( 1 + 0.015 ) 36 - 1]

8,000 = 1000 [ ( 1 + r )6 – 1 ] / r = 11.43 %

 FV of annuity due = ($50,000(1 + .06) [(1 + .06)^5] - 1) / .06)

FVA = 30000 *[ ( 1 + 0.11 )30 – 1 ] / 0.11 = Rs 59,70,626.338

10,00,000 = 50,000 x [ ( 1 + 0.12 )n – 1 ] / 0.12 =10.79 years

You will have to wait for about 11 years.

PV( annuity due) = 10 [ ( 1+0.1 ) (4 - 1) - 1 ] + 10

1080000 = 180000 * [ ( 1 + 0.12 ) n – 1 ]

 PV = 6,00,000 ( 1 + 0.05 ) [ 1- ( 1 + 0.05 ) 5]

 PV of perpetuity = 1000/0.08 = Rs 12,500

Beg of 8th year

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