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MATHEMATICAL PROBLEMS & SOLUTIONS: (SHAJAHAN MINA)

3-1. I. Present Value of a single Amount: Calculate the present value of Tk. 6000 to be (a) received
one year from now; (b) received at the end of five years; (c) received at the end of fifteen years.
Assume 8 percent discounting rate.
II. Present Value of an Ordinary Annuity: Determine the present value of Tk. 700 paid at the
end of each of the next 10 years. Assume 12 percent rate of interest.
III. Present Value of a Stream of Cash Flows: Assuming 10 percent discount rate, compute,
the, present value of Tk.ll00; Tk. 900; Tk.1500 and Tk. 700 to be received at the end of one
through four years.
SOLUTIONS:
I. a).

PV FV

1 i

FV

1 i n

Here,

6000
Tk.5556 ( Ans.)
(1 .08)1

FV= Tk.6000
i = 8% = .08
n=1

b).

PV

6000
Tk.4083.5 ( Ans.)
(1 .08) 5

Here, only change is n = 5

c).

PV

6000
Tk.1891.45 ( Ans.)
(1 .08)15

Here, only change is n = 15

II.

III.

1 1 i n
PVAn (Ordinary Annuity ) PMT

1 1 .1210
Tk.700

.12

Tk. 700 5.650 3955.16 ( Ans.)


PV n

FV n

1 i

CF3
CF1
CF2
CF4

1
2
3
(1 i )
(1 i )
(1 i )
(1 i ) 4

1100
900
1500
700

1
2
3
(1 0.1)
(1 0.1)
(1 0.1)
(1 0.1) 4
1000 743.8017 1126.9722 478.1094
Tk. 3348.88 ( Ans.)

Here,

Here,

PMT= Tk.700
i = 12% = .12
n = 10

CF1= Tk.1100,
CF2= Tk.900
CF3= Tk.1500
CF4= Tk.700
i = 10% = .10

3-2 Compute the present value of each of the following cash flows using a discount rate of 16
percent
(a) Tk. 12,000 cash outflow immediately.
(b) Tk. 16,000 cash inflow one year from now.
(c) Tk" 16,000 cash inflow two years from now.
(d) Tk. 14,000 cash outflow three years from now.
(e) Tk. 17,000 cash inflow three years from now.
(f) Tk. 13,000 cash inflow four years from now.
(g) Tk. 14,000 cash inflow at the end of each of the next five years.
(h) Tk. 14,000 cash inflow at the beginning of each of the next five years.

SOLUTIONS:
a). Present Value = 12,000 because cash outflow occurs immediately.
b).

PV FV

c).

1 i

FV

1 i

Here,
n

16,000
Tk.13793.10 ( Ans.)
(1 .16)1

PV

16,000
Tk.11,890.61( Ans.)
(1 .16) 2

Here, only change is n = 2


Here,

d).

14,000
PV
Tk.8969.21( Ans.)
(1 .16) 3

e).

17,000
PV
Tk.10891.18 ( Ans.)
(1 .16) 3

f).

13,000
PV
Tk.7179.78( Ans.)
(1 .16) 4

FV= Tk.16,000
i = 16% = .16
n=1

FV= Tk.14,000
i = 16% = .16
n=3

Here,

g).

1 1 i n
PVAn (Ordinary Annuity ) PMT

1 1 .165
14,000

.16

45,840.11

FV= Tk.17,000
i = 16% = .16
n=3
Here,

Here,

FV= Tk.13,000
i = 16% = .16
n=4

PMT= Tk.14,000
i = 16% = .16,
n=5

Here,

1
1
h). PVA n ( AnnuityDue ) PMT
1 i
n
i i 1 i

PMT= Tk.14,000
i = 16% = .16,
n=5

1
14,000

1 .16)
5
.16 .16 1 .16
53,174.53
3-3 Your father has promised to give you Tk. 2,00,000 in cash on your 25th Birthday. To day 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 year have to
be if the fund pays 10 percent?
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?
SOLUTIONS:
A. Deposits needed to accumulate a future sum:

PMT

FVAn

1 i n 1

PMT Tk. 14,729

2,00,000
1 .109 1

.10

B. Present value of future amount.

PV FV

1 i

Here,
FVAn= Tk. 2,00,000, PMT= ?,
i = 10% = .10, n = 9
Ordinary Annuity

Here,
FV= Tk.2,00,000
i = 16% = .10
n=9

FV

1 i

2,00,000
Tk.93301( Ans.)
(1 .10) 8

C. Deposits needed to accumulate a future sum:

PMT

FVAn

(1 i ) 1 i n 1

2,00,000

Tk.13386.88
(1 .10) 1 .10 9 1

.10

Here,
FVAn= Tk. 2,00,000, PMT= ?,
i = 10% = .10, n = 9
Annuity Due

3-4(A) IFIC Bank pays 12 percent and compounds interest quarterly. If Tk. 21,000 is deposited
initially, how much shall it grow at the end of 5 years?
(B) How much it will accumulate if the interest is compounded monthly?
SOLUTION:
A. Future Value of a Single Amount:
Here,
Quarterly Compounding:
mn
PV= Tk.21,000, FV=?
i

FV n PV 1
i = 12% = .12
m
m = 4, n = 5

.12
21,000 1

Monthly Compounding:

FV n PV 1
m

45

Tk. 37,928

mn

.12
21,000 1

12

125

Tk. 38,151

Here,
PV= Tk.21,000, FV=?
i = 12% = .12
m = 12, n = 5

3-5 You have committed to your younger sister to present a computer after her graduation at the end
of 5th year from now. The computer will cost Tk. 60,000 at that time. How much should you
deposit at-the beginning of every period during the next 5 years? The deposit should be made
in a savings bank account at 12 percent. How much should be deposited i) Quarterly, ii) Half yearly
and iii) Monthly
SOLUTION:
i. Quarterly Compounding: Deposits needed to accumulate a future sum:
PMT

FVAn

(1 i ) 1 i n 1

60,000

45

.12
.12

) 1
1
(1

4
4

.12

Tk. 2167.94 ( Ans.)

Here,
FVAn= Tk.60,000, PMT= ?, i = 12% = .12, n = 5, m = 4
Annuity Due, Quarterly Compounding

ii. Half Yearly Compounding: Deposits needed to accumulate a future sum:


FVAn
(1 i ) 1 i n 1

60,000

25

.12
.12

) 1
1
(1

2
2

.12

Tk. 4294.41
PMT

Here,
FVAn= Tk.60,000, PMT= ?, i = 12% = .12, n = 5, m = 2
Annuity Due, Half Yearly Compounding

iii. Monthly Compounding: Deposits needed to accumulate a future sum:


FVAn

PMT

Here,
FVAn= Tk.60,000, PMT= ?, i = 12% = .12, n = 5, m =12
Annuity Due, Monthly Compounding

(1 i ) 1 i 1

60,000

125

.12
.12

) 1
1
(1

12
12

.12

12

Tk. 727.39
n

3-6 A bank granted you Tk. 350,000 to buy a car at 15 percent interest p.a. repayable, at the end of
every period over the next 3 years. How much should you pay i) Monthly ii) Quarterly iii) Half yearly
iv) Bimonthly v) Yearly
SOLUTION:
i. Loan Installment at the end of every month Present value of an ordinary annuity

PMT

PVAn

Here,
PVAn= Tk3,50,000, PMT= ?, i = 15% = .15, n = 3, m =12
Ordinary Annuity- Monthly Payment

1
1

n
i i 1 i
3,50,000

1
1
.15 .15 .15 123
12
1

12 12

12,133 ( Ans.)

ii. Loan Installment at the end of every quarter Present value of an ordinary annuity

PMT

PVAn

Here,
PVAn= Tk3,50,000, PMT= ?, i = 15% = .15, n = 3, m =4
Ordinary Annuity- Quarterly Payment

1
1

n
i i 1 i
3,50,000

1
1
.15 .15 .15 43
4
1

4
4

36,754 ( Ans.)

iii. Loan Installment at the end of every six month Present value of an ordinary annuity

PMT

PVAn

Here,
PVAn= Tk3,50,000, PMT= ?, i = 15% = .15, n = 3, m =2
Ordinary Annuity- Half Yearly Payment

1
1

n
i i 1 i
3,50,000

1
1
.15 .15 .15 23
2
1

2
2

74,565 ( Ans.)

iv. Loan Installment Bimonthly Present value of an ordinary annuity

PMT

PVAn

Here,
PVAn= Tk3,50,000, PMT= ?, i = 15% = .15, n = 3, m =6
Ordinary Annuity- Bimonthly Payment

1
1

n
i i 1 i
3,50,000

1
1
.15 .15 .15 63
6
1

6
6

3,50,000
1

63
.025 .025 1 .025

3,50,000
24,384 ( Ans.)
40 25.65

v. Loan Installment at the end of every period Present value of an ordinary annuity

PMT

PVAn
1
1

n
i i 1 i
3,50,000

13
.15 .15 1 .15

Here,
PVAn= Tk3,50,000, PMT= ?, i = 15% = .15, n = 3, m =1
Ordinary Annuity- Yearly Payment

1,53,284 ( Ans.)

3-7 You have an opportunity to invest Tk. 5 0 , 0 0 0 now. The expected net cash benefits from the
investment over the next 4 years are Tk. 15,000, Tk. 20,000, Tk.7000, and Tk.12000 respectively.
Should you invest your fund if your cost of capital is 15 percent?
Here,
SOLUTION:
FV1= Tk.15,000
Present value of a mixed stream:
FV 2= Tk.20,000
FVn
FV3
FV 3= Tk.7,000
FV1
FV2
FV4
PVn

n
1
2
3
4
FV 4= Tk.12,000
1 i 1 i 1 i 1 i 1 i
i = 10% = .15
15,000
20,000
7,000
12,000

1 .151 1 .152 1 .153 1 .154


13,043.48 15,122.87 4,602.6 6,861.04 Tk. 39,630 ( Ans.)
Comment: As the total present value of future cash flow is less than the initial investment, we shall
not invest in the said project.
3-8 Mr. Abul Barkat is borrowing Tk. 50,000 to buy a low-cost house. If he pays annual equal
installments for 25 years and 8 percent interest on outstanding balance what is the amount of
installment? What shall be the amount of installment if quarterly payments are required to be
made?
SOLUTION:
Here,
I. yearly Loan Installment due at the end of every year:

PMT

PVAn

50,000

PVAn= Tk50,000, PMT= ?, i = 8% = .08,


n = 25, m =1,
Ordinary Annuity- Yearly Payment

1 1
1

n
25
i i 1 i .08 1 .08
50,000
50,000

4,684 ( Ans.)

12.24
1
12.50
25
.08 1 .08

II. Yearly Loan Installment due at the end of every quarter:


PMT

PVAn
1

1

n
i i 1 i

50,000

1
1

425
.08

.08
.08
4

4
4

50,000

1
50

1
425

1 .08
.08

Here,
PVAn= Tk50,000, PMT= ?, i = 8% = .08,
n = 25, m =4,
Ordinary Annuity- Quarterly Payment

50,000
1,160 ( Ans.)
43.098

3-9 Determine the future value utilizing a time preference rate of 10 percent
(A) The future value of Tk.15,000 invested now for a period of four years.
(B) The future value at the end of five years of an investment; of Tk. 6,000 now and of an
investment of Tk. 6,000 one year from now.
(C) The future value at the end of eight years of an annual deposit of Tk. 8,000 each year to be
made at the end of each year.
(D) The future value at the end of eight years of annual deposit of Tk. 8,000 at the beginning
of each year.
SOLUTION:
A. Future value of a single amount:

Here,
PV= Tk.15,000, FV=?
i = 10% = .10
m = 1, n =4

FV n PV 1 i

15,000 (1 .10) 4
21,961.50
B. Future value of a single amount:

Here,
PV= Tk.6,000, FV=?
i = 10% = .10
m = 1, n =5

FV n PV 1 i

6,000 (1 .10) 5
9,663.06

Here,
PV= Tk.6,000, FV=?
i = 10% = .10
m = 1, n =4

FV n PV 1 i

6,000 (1 .10) 4
8,784.60
C. Future value of an ordinary annuity:

1 .10 1
(Ordinary Annuity ) 8,000
8

FVAn

.10
8,000 11.436 91,487

Here,
PV= Tk.6,000, FV=?
i = 10% = .10
m = 1, n =8

D. Future value of an annuity due:

PMT 1 i 1 i n 1
FVAn ( AnnuityDue )

8,000 1 .10 1 .108 1 8,800 1.1436

.
10
.10

1,00,637 ( Ans.)

3-10 Exactly ten years from now Mr. Rahman will start receiving a pension of Tk.50,000 a year. The
payment will continue for five years. How much is the pension worth now, if Mr. Rahman's expected
rate of return is 12 percent?
SOLUTION: Present value of a deferred annuity:
We can take the help of a time line to better understand the problem and finding the appropriate
solution. It is said that Mr. Rahman will start receiving pension ten years from now and it will
continue for five years. So, it will be a payment of annuity format and as after 10 years the payment
will start, it will take the form of a deferred annuity.
0

10

11

12

13

14

15

PV of an ordinary annuity

Present value of single amount

First of all present value of an ordinary annuity,

1 1 i n
PVAn (Ordinary Annuity ) PMT

Here,

1 1 .125
Tk.50,000

.12

Tk. 50,000 3.6048

PMT= Tk.50,000
i = 12% = .12
n = 5, PV=?

Tk.1,80,239
No, we have to find out the PV of a single amount that is the PV of this ordinary annuity just
calculated, because this amount will result after 10 years.

PV FV

1 i

Here,

FV

1 i

1,80,239
Tk. 58,032( Ans.)
(1 .12)10

PMT= Tk.1,80,239
i = 12% = .12
n = 10, PV=?

3-11 Determine the present value of the cash inflows of Tk. 13,000 at the end of each year for next
4- years and Tk. 17,000 and Tk. 10,000 respectively at the end of years 5 and 6. The appropriate
discounting rate is 14 percent.
SOLUTION: Present value of an ordinary annuity and a mixed stream (combined):

1 1 i n
PV (Ordinary Annuity ) PMT

And PV of a stream,

PV n

FV n

1 i

If we combine these two then it forms like,


Total PV PV (Ordinary Annuity ) PV of a Stream of CF
1 1 i n
FVn
PMT

i
1 i n

1 1 .14 4
17000
10000
13,000

5
.14
1 .14
1 .146

37,878.26 8,829.27 4,555.87


37,878.26 13,385.14 51,263.40

3-12 Assume an, annual rate of interest of 12 percent. The sum of Tk. 10,000 received immediately
is equivalent to what amount to be 'received in ten equal annual payments if;
A. The first payment to be received one year from now. What could be annual amount.
B. If the first payment were received immediately. What could be the amount?
SOLUTION: PMT associated with Present value of annuity:
A. Present Value of an Ordinary Annuity: Present Value of an Ordinary Annuity formula can be
solved to find out the PMT associated with a PV of a future amount.
1 1 i
PVAn (Ordinary Annuity ) PMT

PVAn (Ordinary Annuity )


PMT
1 1 i n

10,000
10,000
PMT

1,769.91
10
5
.65022
1 1 .12

.12

Here,
PV= 10,000, PMT= ?
i = 12% = .12, n = 10
Ordinary Annuity

B. A. Present Value of an Annuity Due: Present Value of an Annuity Due formula can be solved to
find out the PMT associated with a PV of a future amount.
1

1
PVAn ( AnnuityDue ) PMT
1 i
n
i i 1 i

Here,
PV= 10,000, PMT= ?
i = 12% = .12, n = 10
Annuity Due

PVAn ( AnnuityDue )
1

1
1 i

n
i i 1 i
10,000
10,000
PMT

1,580.22
6.32825
1

1 .12

10
.12 .12 1 .12

PMT

3-13 It is estimated that an investment in an item of equipment will cause the following cash flows:
Years

Net cash inflow

Net cash outflow

Tk. 60000

20000

2
3

20000
30000

30000

5
6

30000
30000

The firm wishes to earn at least -15 percent per annum on projects of this type. Calculate the
present values of the expected net cash inflows and outflows and comment on the course of
action to be taken.
SOLUTION: In the reference box cash inflows are indicated by positive numbers and outflows are
indicated by negative numbers.
Here,
CF0= Tk. 60,000
Present Value of Cash Inflows:
CF1= Tk. 20,000
FV n
CF3
CF5
CF6
CF2
CF4
CF2= Tk. 20,000
PV n

n
2
3
4
5
6
CF3= Tk.30,000
1 i (1 i) (1 i) (1 i) (1 i) (1 i)
CF4= Tk.30,000
20,000
30,000
30,000
30,000
30,000
CF5= Tk.30,000

2
3
4
5
6
CF6= Tk.30,000
(1 .15)
(1 .15)
(1 .15)
(1 .15)
(1 .15)
i = 15% = .15
79,886.09

Present Value of Cash Outflows:


PV n

FV n

1 i

60,000

CF1
CF2

0
(1 i )
(1 i )1

20,000
77,391.3
(1 .15)1

Comment: As the PV of inflows are higher that PV of outflows we can invest in the project.

3-14 A company has decided to set up a sinking fund to replace an, asset in 6 years time. The value
of the fund after 6 years must be Tk. 80,000 and, the fund is expected to earn interest at the
rate of 8 percent per annum.
A. What must be the annual payment into the fund, commencing at the end of year 1 and with a final
payment the end of year 6?
B. What will be the total value of annual payments into the fund?
C. Is there any difference between your value in (b) and Tk. 80,000? If so, why does it exist?
SOLUTION:
A. Sinking Fund Requirement: We can solve the future value of an annuity formula to find out the
required payment:
Here,
FVAn= Tk. 80,000, PMT= ?,
FVAn PMT ( FVIFi ,n )
i = 8% = .08, n =6
FVAn
Sinking Fund Ordinary Annuity
PMT
FVIFi ,n
PMT

FVAn

1 i 1

80,000
1 .08 1

.08

80,000
10,905
7.3359

B. Total value of the payments:


Each PMT will be: 10,905. As there will be total 6 payments,
So the total value will be: 10,905 x 6 = 65,430
C. There is difference between total value and the sinking fund requirement. It happens because of
the interest earnings on each installment.
3-15 A company raises Tk. 75,000 loan at a 10 percent annual rate of interest. The interest payment
is Tk. 7,500 each year. The principal of the loan i.e. Tk.75,000 must be repaid at the end of 5
years. The company decides to provide for this repayment by setting up a sinking fund into which it
can afford to put Tk. 12,000 per annum for 5 years starting at the end of the first year. Interest
earned in the sinking fund will be 9 percent.
(A)
(B)

Will the fund be large enough at the end of 5 years to repay the loan?
If not, what should be the annual payment into the fund?

SOLUTION:
A. Future value of an ordinary annuity:

Here,
FVAn=?, PMT= 12,000,
i = 9% = .09, n =5
Ordinary Annuity

1 i 1
n

FVAn (Ordinary Annuity ) PMT

i
1 .095 1
FVAn (Ordinary Annuity ) 12,000
.09
12,000 5.9847 71,816

B. Sinking Fund Requirement: We can solve the future value of an annuity formula to find out the
required payment:
Here,
FVAn= Tk. 75,000, PMT= ?,
FVAn PMT ( FVIFi ,n )
i = 9% = .09, n =5
FVAn
Sinking Fund Ordinary Annuity
PMT
FVIFi ,n
PMT

FVAn

1 i 1

75,000
1 .09 1

.09

75,000
12,532
5.9847

3-16 A. You won Tk. 10 Lakh from a lottery. You would like to deposit the money with Green
Delta Life Insurance Company at 12 percent interest rate. The insurance company offered you
Tk.10,500 in monthly equal installment over next 20 years. Should you accept the offer? If the
insurance company offers Tk. 11,500 every month instead of Tk. 10,500 what will be your decision?
SOLUTION:
Present value of an ordinary annuity formula can be solved for the requirement:
When the payment is 10,500:

1 1 i
PVAn (Ordinary Annuity ) PMT
i

mn

Here,
PV= 10,00,000, PMT= 10,500
i = 12% = .12, n = 20
Ordinary Annuity

1220

.12
1

240

12
10,500 1 1 .01
10,500

.12
.01

12

10,500 90.82 9,53,604


Comment: No, I shall not accept the offer, because the total present value of the annual payment is
less than the initial investment.
When the payment is 11,500:

1 1 i
PVAn (Ordinary Annuity ) PMT
i

mn

Here,
PV= 10,00,000, PMT= 11,500
i = 12% = .12, n = 20
Ordinary Annuity

1220

.12
1

1 1 .01 240
12

11,500
11,500

.12
.01

12

11,500 90.82 10,44,423


Comment: Yes, in this situation I can accept the offer, because the total present value of the annual
payment is higher than the initial investment.

3-17: A Real Estate Company, by an arrangement with BHBFC granted you Tk. 3,00,000 as loan at 12
percent interest rate p.a. you are to pay in ten annual equal installments, twenty yearly equal installments, or in 120
monthly equal installments. Calculate the installment money under the above three methods.
SOLUTION:
i. Loan Installment at the end of every year Present value of an ordinary annuity

PMT

Here,
PVAn= Tk3,00,000, PMT= ?, i = 12% = .12, n =10, m =1
Ordinary Annuity- Yearly Payment

PVAn
1
1

n
i i 1 i
3,00,000

110
.12 .121 .12

53,095 ( Ans.)

ii. Loan Installment at the end of every year Present value of an ordinary annuity

PMT

PVAn
1
1

n
i i 1 i
3,00,000

20
.12 .12 1 .12

Here,
PVAn= Tk3,00,000, PMT= ?, i = 12% = .12, n =20,
Ordinary Annuity- Yearly Payment

40163 ( Ans.)

iii. Loan Installment at the end of every month Present value of an ordinary annuity

PMT

PVAn
1
1

n
i i 1 i
3,00,000

1
1
.12 .12 .12 1210
12
1

12 12

Here,
PVAn= Tk3,00,000, PMT= ?, i = 12% = .12, n = 10, m =12
Ordinary Annuity- Monthly Payment

4,304 ( Ans.)

3-18 Your elder brother committed to present you a computer on your completion of M.B.A.
program after five years from now. The computer will cost Tk. 50,000. How much should

your elder brother deposit to a bank at 12 percent interest? The deposit should made Monthly,
Quarterly, Yearly at the beginning of every period.
i. Monthly Compounding: Deposits needed to accumulate a future sum:
FVAn

PMT

Here,
FVAn= Tk.50,000, PMT= ?, i = 12% = .12, n = 5, m =12
Annuity Due, Monthly Compounding

(1 i ) 1 i 1

50,000

125

.12
.12

) 1
1
(1

12
12

.12

12

Tk. 606.20
n

ii. Quarterly Compounding: Deposits needed to accumulate a future sum:


PMT

FVAn

(1 i ) 1 i n 1

50,000

45

.12
.12

) 1
1
(1

4
4

.12

Tk. 1,806( Ans.)

Here,
FVAn= Tk.50,000, PMT= ?, i = 12% = .12, n = 5, m = 4
Annuity Due, Quarterly Compounding

iii. Yearly Compounding: Deposits needed to accumulate a future sum:


PMT

FVAn

(1 i ) 1 i 1

60,000

(1 .12) 1 .12 5 1

.12

Tk. 7,027.22 ( Ans )


n

Here,
FVAn= Tk.50,000, PMT= ?, i = 12% = .12, n = 5, m =12
Annuity Due, Yearly Compounding