Time Value of Money Practical Applications

1. The HR head, Suresh Krishna of Dorr has been asked by the CEO to project
the likely employee strength after 10years. The current strength is 5000
employees, and based on the future plans, he expects the strength to by 5%
every year.
2. Supposing you have inherited an ancestral property which was bought for Rs
25 /- in 1624. If the average appreciation in the value can be considered to be
6% per annum, what would be the value of the property you have inherited
as to today?
3. Indiana Limited has worked out a strategy to scale up the turnover from the
present level of Rs 100 million to Rs 1000 million 2022. The CEO asks the
Finance Head to work out the Compounded Annual Rate of Growth (CARG).
4. Ravi, a young employee of 28 years, working as a software engineer for a
company decides that based on his net salary he can deposit an amount of
Rs 30,000/- every year into the Public Provident Fund for the balance tenure
of his employment. The Provident fund trust is expected to declare an
average annual interest @9% every year. The retirement age of the company
is 58. He seeks financial advise to understand what would the amount
become at the time of this retirement.
5. Sunil is keen to invest in a house but finds out that he is short of finance and
he needs to save enough before he can buy one. He expects two bedroom
apartment at the end of the 5 years would be around Rs 7 million. He seeks
financial advice as to how much he should save annually and put these into
deposits which is expected to earn interest of 12% annually.
6. Future Limited has an obligation to redeem Rs 500 million bonds in 6 years.
How much should the company deposit annually in a sinking fund wherein it
earns 14% interest to cumulate Rs 500 million in 6 years time?
7.

Angle Finance has issued an advertisement seeking deposits. The

advertisement indicates that the company will pay a lump sum of Rs 9000/at the end of 6 years for any investor who deposits annually Rs 1000/- for 6
years. What would be the interest rate offered by the company?

8. Kishore wants to buy a car. After reviewing his net take home salary, he has
found out that he can afford to pay Rs 12,000/- per month for 3 years for a
new car. Interest on the car loan shall be @14% per annum compounded
monthly.
9. Adarsh Limited has borrowed Rs 1 million at an interest rate of 15% and the
loan is to be repaid in five equal instalment payable at the end of the next 5
years. What would be the annual installment payment? What would be the
amortisation schedule

10.Satish as the borrower has two financing options available from the lender.
The first option is to offer loan at 21% while in second case it is at 22.5%. In
the first case compounding is done on a quarterly basis, while in the second
case it is on annual basis. Which of the two options would be better for
Satish?

Small Case Study

As an investment advisor you have approached by a client called

Mahesh, who wants some help in investment related areas.
Mahesh is currently 45 years old and presently has a total savings
amount of Rs 6,00,000/- in his savings bank account. He plans to
work for another 15 years and plans to retire at the age of 60. His
present salary Rs 10,00,000 per annum and he expects a steady
increase over the years which will help him build up reasonable
savings towards building up his corpus as part of his retirement
plan.
Based on your earlier advice, Mahesh is now planning to spread
over his present investment as well as his future savings in a
portfolio which would be distributed between Equity 40%, Debt
40%, Fixed deposits 20%. It is expected that the investment
should give him an annualized return of 15%, debt an average
return of 10% (net of taxes), and fixed deposits 6% (net of taxes).
Once Mahesh retires at the age of 60, he plans to withdraw Rs
20,00,000/- every year from the corpus he would have built at the
time he attains the age of 60 years. While he is aware that life
expectancy is a highly uncertain issue, he thinks it would be fair
to assume that he could live for another 25 years after his
retirement from service. He would also like to continue with the
portfolio in the same proportion giving the annualized return as
mentioned above. He also wants to bequeath Rs 50,00,000/-each
to his son and daughter at the end of his life expectancy term.

He now seeks your advice as to how he should go about planning

for his future and the remaining part of his life.