FINANCIAL MANAGEMENT

TIME VALUE OF MONEY

PRACTICE QUETIONS

1) Jamal makes a deposit of Rs. 12,000 in a bank account. The deposit is to earn interest annually at
the rate of 9 percent for seven years.
a) How much will Jamal have on deposit at the end of seven years?
b) Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much would
he have at the end of seven years?
c) In comparing parts (a) and (b), what is the respective effective annual rate? Which alternative is
better?

2) An investor can make an investment in a real estate development and receive an expected cash
return of Rs. 45,000 after six years. Based on a careful study of other investment alternatives, she
believes that an 18 percent annual return compounded quarterly is a reasonable return to earn on this
investment. How much should she pay for it today?

3) Suppose you have the opportunity to make an investment in a real estate venture that expects to pay
investors Rs.750 at the end of each month for the next eight years. You believe that a reasonable
return on your investment should be 18 percent compounded monthly.
a) How much should you pay for the investment?
b) What will be the total sum of cash you will receive over the next eight years?

4) Ahmad is evaluating an investment that will provide the following returns at the end of each of the
following years: year 1, Rs.12,500; year 2, Rs.10,000; year 3, Rs.7,500; year 4, Rs.5,000; year 5,
Rs.2,500; year 6, Rs.0; and year 7, Rs.12,500. Ahmad believes that he should earn an annual rate of
12 percent on this investment. How much should he pay for this investment?

5) A loan of Rs. 50,000 is due 10 years from today. The borrower wants to make annual payments at the
end of each year into a sinking fund that will earn interest at an annual rate of 10 percent. What will
the annual payments have to be?

6) Suppose you deposit Rs. 5,000 into an account earning 4 percent interest, compounded monthly.
How many years will it take for your account to be worth Rs. 7,500?

7) What is the future value of Rs. 3,500 deposited for 12 years at 5 percent interest, compounded
annually?

8) A company offers a fixed deposit scheme whereby Rs. 10,000 matures to Rs. 12,625 after 2 years,
on half- yearly compounding basis. If the company wishes to amend the scheme by compounding
interest every quarter, what will be the revised maturity value?

9) A person is required to pay four equal annual payments of Rs. 4,000 each in his Deposit account
that pays 10 per cent interest per year. Find out the future value of annuity at the end of 4 years.

10) If the discount rate is 14%, what is FV10 of Rs.300 received at the end of each of the next 10 years
except for the fourth year?

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11 Assume that it is now January 1, 2009. On January 1, 2010, you will deposit Rs.1,000 into a saving
account that pays 8%.
a) If the bank compounds interest annually, how much will you have in your account on January 1,
2013?
b) What would your January 1, 2013, balance be if the bank used quarterly compounding rather than
annual compounding?
c) Suppose you deposited the Rs.1,000 in 4 payments of Rs.250 each on January 1 of 2010, 2011,
2012, and 2013. How much would you have in your account on January 1, 2013, based on 8%
annual compounding?
d) Suppose you deposited 4 equal payments in your account on January 1 of 2010, 2011, 2012 and
2013. Assuming an 8 percent interest rate, how large would each of your payments have to be for
you to obtain the same ending balance as you calculated in part a?

12 Assume that it is now January 1, 2009, and you will need Rs.1,000 on January 1, 2013. Your bank
compounds interest at an 8 percent annual rate.
a) How much must you deposit on January 1, 2010, to have a balance of Rs.1,000 on January 1,
2013?
b) If you want to make equal payments on each January 1 from 2010 through 2013 to accumulate
the Rs.1,000, how large must each of the 4 payments be?
c) If your father were to offer either to make the payments calculated in part b (Rs.221.92) or to give
you a lump sum of Rs.750 on January 1, 2010, which would you choose?
d) If you have only Rs.750 on January 1, 2010, what interest rate, compounded annually, would you
have to earn to have the necessary Rs.1,000 on January 1, 2013?
e) To help you reach your Rs.1,000 goal, your father offers to give you Rs.400 on January 1, 2010.
You will get a part-time job and make 6 additional payments of equal amounts each 6 months
thereafter. If all of this money is deposited in a bank, which pays 8 percent, compounded
semiannually, how large must each of the 6 payments be?
f) What is the effective annual rate being paid by the bank in part f?

13 a) Find the present values of the following cash flow streams. The appropriate interest rate is 10
percent.
YEAR CASH STREAM A CASH STREAM C
1 Rs.1,000 Rs.5,000
2 Rs.4,000 Rs.5,000
3 Rs.4,000 Rs.5,000
4 Rs.4,000 Rs.5,000
5 Rs.3,000 Rs.5,000
b) What is the value of each cash flow stream at a zero percent interest rate?

14 The ABC Company expects to receive Rs.100,000 for a period of 10 years from a new project it has
just undertaken. Assuming a 10 per cent rate of interest, how much would be the present value of this
annuity?

15 Universal Bank pays 9 percent interest, compounded annually, on time deposits. Regional Bank pays
8 percent interest, compounded quarterly. Based on effective interest rates, in which bank would you
prefer to deposit your money?

16 Set up an amortization schedule for a Rs.25,000 loan to be repaid in equal installments at the end of
each of the next five years. The interest rate is 10 percent.

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