Stick to basics.

Follow golden rules

Simple interest and compound interest:
(1). Principal amount is Rs.100, interest rate is 10% and term is 2 years. Find simple
interest amount. Find maturity (i.e. future value) amount when simple interest is 10%.

Simple interest amount = ( P * T * R ) / 100

Simple interest amount = ( Rs.100 * 2 Years * 10 ) / 100 = Rs.20
Maturity Amount = Principal Amount + Simple Interest Amount
Maturity (i.e. future value) amount = ( Rs.100 + Rs.20 ) = Rs.120

(2). Principal amount is Rs.100, interest rate is 10% and term is 2 years. Find maturity
(i.e. future value) amount. Find compound interest amount.

Maturity (i.e. future value) Amount = P ( 1 + r / 100 ) n

Maturity Amount = 100 ( 1 + 10 / 100 ) 2 = 100 (1.1)2 = 100 (1.21) = Rs.121
Compound Interest Amount = Maturity Amount Principal Amount
Compound Interest Amount = Rs.121 - Rs.100 = Rs.21

Important Note: NPV and IRR calculations are done using Compound Interest Concept
and NOT simple interest concept.

Note:
(i) In PTR/100 (of simple interest) we get the interest amount only and not the
maturity Amount. Here,
Maturity amount = Principle amount + Interest Amount i.e. = P + PTR / 100
For example, Find out the maturity amount of Rs.100 to be invested at the
simple interest of 10% for next 3 years
Maturity amount = 100 + 100 * 3 years * 10 / 100 = 100 + 30 = 130
(ii) In P( 1 + r / 100 )n (of compound interest) we get the maturity amount only
and not the interest amount. Here,
Interest Amount = Maturity Amt. - Principle Amt. i.e. = P( 1 + r / 100 )n - P
For example, Find out the interest amount when Rs.100 invested at compound
interest of 10% for the next 2 years.
Interest Amount = 100( 1 + 10 / 100 )2 - 100 = 121 100 = 21
(iii) Future Value means Maturity Amount hence both can be used
interchangeably.

Page 1 of 44
Exercise: Rs.90000 invested for 3 years at 20% interest.
(1). Find out simple interest amount
(2). Find out compound interest maturity amount
(3). Find out the maturity amount as per SIMPLE INTEREST
(4).Find out interest amount as per COMPOUND INTEREST
Answer:
(1). Simple Interest Amount = P*T*R / 100 = 90000 * 20 * 3 / 100 = 54000
(2). F.V. Or Maturity Amount = P * (1+r/100)n = 90000(1+20/100)3 = 155520
(3). Maturity Amount as per SIMPLE Interest = P + Interest Amount = 90000+54000
(4). INTEREST AMOUNT as per compound interest =
F.V. Or Maturity Amount Principle Amount = 155520 90000 = 65520

Time Value of Money:

Rs.100 invested at 10% rate of return amounts to Rs.110 after one year. That means,
receiving of Rs.100 today is equal to receiving of Rs.110 after one year, at 10% rate of
return
OR
There is neither profit nor loss when one either prefers to receive Rs.100 today OR
prefers to receive Rs.110 after one year when discount/interest rate of 10% is assumed.

The above example indicates that time value of money includes present value of
money and future value of money due to its potential earning capacity.
(1)Here Rs.100 is the present value of money to be received today, for Rs.110 to be
received at the end of one year at 10%
(2)Whereas Rs.110 is the future value of money to be received at the end of one
year for Rs.100 invested today at 10%.

Future Value and Present Value:

(1)What you receive TODAY Or spend TODAY, it is its Present Value i.e.
calculated/discounted for TODAY at some % rate of interest.
(2)What you receive at some FUTURE point of time is its Future Value Or Maturity
Value i.e. calculated at some % rate of interest.

Options of Calculation:
You have the option of calculating present value of single cash inflow (of any time)
You have the option of calculating present value of ALL cash inflows (of any time)
Page 2 of 44
You have the option of calculating future value of single cash inflow (of any time)
You have the option of calculating future value of ALL cash inflows (of any time)

You have the option of calculating present value of single cash outflow (of any time)
You have the option of calculating present value of ALL cash outflows (of any time)
You have the option of calculating future value of single cash outflow (of any time)
You have the option of calculating future value of ALL cash outflows (of any time)

You have the option of calculating present value of ALL cash inflows (of any time) and
ALL cash outflows (of any time).

For the purpose of calculation:

(i) you can derive at (i.e. find out) present value (i.e. value as on today, starting
value, principle amount) for a given future value (i.e. ending value, maturity
amount) . For example find out present value of Rs.121 to be received at the
end of 3rd year. Assume 10% interest rate. (Answer: Rs.100)
OR
(i) you can derive at (i.e. find out) future value (i.e. ending value, maturity
amount) of a given present value (i.e. value as on today, starting value,
principle amount). For example find out future value of Rs.100 to be received
at the end of 2nd year. Assume 10% interest rate. (Answer: Rs.110)

For the purpose of comparison:

(i) you can compare the present value (i.e. value as on today, starting value,
initial amount, principle amount) of a given future value (i.e. ending value,
maturity amount) at ---% rate VERSUS at ---% rate. For example find out
present value of Rs.350 to be received at the end of 3rd year when the interest
rate assumed is at 10% and when the interest rate is assumed is at 15%
OR
(ii) you can compare the future value (i.e. ending value, maturity amount) of a
given present value (i.e. value as on today, starting value, initial amount,
principle amount) at ---% rate VERSUS at ---% rate. For example find out
future value of Rs.500 to be received at the end of 3rd year when the interest
rate assumed is at 9% and when the interest rate is assumed is at 12%
OR
(iii) you can compare the future value (i.e. ending value, maturity amount) of a
some cash outflow or set of cash outflows with that of todays cash inflow i.e.
Page 3 of 44
 present value of cash inflow. For example you are going to spend Rs.110 at the
end of 1st year (i.e. n = 1), Rs.121 at the end of 2nd year (i.e. n = 2). You are
going to receive Rs.20 at the beginning of the year (i.e. n = 0 ) and Rs.220 at
the end of 1st year (i.e. n = 1 ). The interest assumed is 10%. Conclusion: You
are going to receive Rs.220 as of today (i.e. 20/(1+10/100)0 + 220/(1+10/100)1
= 200 + 20 = 220 ) whereas you are going to spend Rs.200 (i.e. 110/(1+10/100)1
+ 121/(1+10/100)2 = 100+100 = 200) as of today.
Final Conclusion: Today you are receiving (i.e. P.V. all cash inflows) Rs.220
whereas today you are spending (i.e. P.V. all cash outflows) Rs.200. Therefore
you are at a profit of Rs.20 (i.e. P.V. all cash inflows - P.V. all cash outflows = 220
200 = +20 = Net Present Value)
OR
(iv) you can compare the present value (i.e. value as on today, starting value,
initial amount, principle amount) of a some cash inflow or set of cash
inflows with that of todays cash outflow i.e. present value of cash outflow. For
example you are going to receive Rs.110 at the end of 1st year (i.e. n = 1),
Rs.121 at the end of 2nd year (i.e. n = 2). You are going to spend Rs.20 at the
beginning of the year (i.e. n = 0 ) and Rs.220 at the end of 1st year (i.e. n = 1 ).
The interest assumed is 10%. Conclusion: You are going to spend Rs.220 as of
today (i.e. 20/(1+10/100)0 + 220/(1+10/100)1 = 200 + 20 = 220 ) whereas you
are going to receive Rs.200 (i.e. 110/(1+10/100)1 + 121/(1+10/100)2 =
100+100 = 200) as of today.
Final Conclusion: Today you are receiving (i.e. P.V. all cash inflows) Rs.200
whereas today you are spending (i.e. P.V. all cash outflows) Rs.220. Therefore
you are at a loss of Rs.20 (i.e. P.V. all cash inflows - P.V. all cash outflows = 200
220 = -20 = Net Present Value)

CONCLUSION: From the above it is clear that you can either find out the present value
of cash inflows OR find out the present value of cash outflows OR find out the future
value of cash inflows OR find out the present value of cash outflows OR find out the
NET PRESENT VALUE (i.e. NET of P.V. of all cash inflows P.V. of all cash outflows) of
both cash inflows and cash outflows.

(1).Find future value of Rs.100 at 10% compound interest for next 2 years.
Maturity Amount Or Future Value = P ( 1 + r / 100 ) n
= 100 ( 1 + 10 / 100 )2 = Rs.121

Page 4 of 44
(2).Find present value of Rs.121 received at the end of 2nd year assuming discount rate
or interest rate of 10%.
Maturity Amount Or Future Value = P * ( 1 + r / 100 ) n
Maturity Amount Or Future Value = Present Value * ( 1 + r / 100 ) n
Present Value * ( 1 + r / 100 ) n = Maturity Amount
Present Value = Maturity Amount / ( 1 + r / 100 ) n
Present Value = Rs.121 / (1 + 10/100)2
Present Value = Rs.121 / (1.1)2
Present Value = Rs.121 / (1.21)
Present Value = Rs.100

Note: Principle amount can be considered as PRESENT VALUE since principle amount
is invested as of TODAY (i.e. beginning amount / starting amount etc.)
= 100 ( 1 + 10 / 100 )2 = Rs.121. Here Rs.100 is principle amount invested today.

Conclusion I
Future Value OR Maturity Amount = P * ( 1 + r / 100 ) n = Rs.121.

Conclusion II
P * ( 1 + r / 100 ) n = Future Value OR Maturity Amount

P = Future Value OR Maturity Amount / P * ( 1 + r / 100 ) n = Rs.100

Exercise I
(i) How much one needs to invest as on today to receive Rs.30,00000 at the end
of 5th year at the interest rate of 10%.
(ii) In the above (i) question Rs.30,00000 is called as Future Value OR Maturity
Value. True/False
(iii) In the above (i) question you have been asked to find out Present Value.
True/False
Answer:
(i). Present Value = Future Value / (1+r/100)n =30,00000 / (1+10/100)5 =1862763.9
(ii). True
(iii). True

Exercise II
(i) What is the amount to be received at the end of the 5th year if one invests
Page 5 of 44
 Rs.10,00000 as on today at the interest rate of 10%.
(ii) In the above (i) question Rs.10,00000 is called as Present Value (i.e. Principle
Amount OR Value as on TODAY). True/False
(iii) In the above (i) question you have been asked to find out Future Value OR
Maturity Value. True/False
Answer:
(i).Future Value = P * (1+r/100)n = 10,00000 * (1+10/100)5 = 1610510
(ii) True
(iii) True
Exercise III
(i) What are the different names for Present Value?
Answer: Principal Amount, Value as on today, Starting/beginning Amount
(ii) What are the different names for Future Value?
Answer: Maturity Amount ( or TOTAL AMOUNT (i.e. principle amount + interest
amount) to be received at the end of ___ year )
Exercise IV
In a business proposal the investor has been assured to receive Rs.88000 at the end
of 1st year for his investment of Rs.80000 as on today.
Mr.A is an investor expecting an return of 8%
Mr.B is an investor expecting an return of 12%
What will be the decision of Mr.A and Mr.B
Answers : ( Two Types of answers )
Answer Type (1) : using the concept of Present Value.
(1.1) The present value of Rs.88000 to be received at the end of first year, at 8%
interest rate is Rs.81481 but Mr.A has been asked to invest only Rs.80,000
hence Mr.A will invest in this business proposal.
(1.2) The present value of Rs.88000 to be received at the end of first year, at 12%
interest rate is Rs.78,571 but Mr.B has been asked to invest Rs.80,000 hence
Mr.B will NOT invest in this business proposal.

Answer Type (2) : using the concept of Future Value.

(2.1) The future value of Rs.80,000 invested today, at the end of first year, at 8%
interest rate is Rs.86400 but Mr.A is getting Rs.88,000 hence Mr.A will
invest in this business proposal.
(2.2)The future value of Rs.80,000 invested today, at the end of first year, at 12%
interest rate is Rs.89600 but Mr.B is getting just Rs.88,000 hence Mr.B will
Page 6 of 44
 NOT invest in this business proposal.

Net Present Value (N.P.V.) of money:

N.P.V. = Present Value (i.e.Today) of all cash inflows Present Value (i.e.Today) of all
cash outflows.
N.P.V. = What you receive Today - What you pay Today

Example I
(a). Interest rate assumed for this example is 10%
(b). You are going to receive Rs.110 at the end of 1st year (we already know that
present value of Rs.110 to be received at the end of 1st year is Rs.100, at 10%)
(c). You are going to pay Rs.12.1 at the end of 2nd year (we already know that present
value of Rs.12.1 to be received at the end of 2nd year is Rs.10, at 10%)
(d). Net Present Value = P.V. of cash inflows P.V. of cash outflows
N.P.V. = 110/ (1+10/100)1 - 12.1 / (1+10/100)2
N.P.V. = 100 - 10 = 90
N.P.V. = What you receive Today - What you pay Today
N.P.V. = You are receiving Rs.100 as on Today You are paying Rs.10 as on Today
Therefore, as on TODAY, you are at a profit of Rs.90 (i.e. Rs.100-Rs.10)

Example II
Today you purchased (Cash Outflow) Rs.1,00000 worth of machinery. You spent (Cash
Outflow) Rs.12100 at the end of 2nd year for repairs and maintenance. You sold (Cash
Inflow) the machine for Rs.26,620 at the end of 3rd years. Your business revenues (Cash
Inflow) were Rs.30000, Rs.40000, and Rs.50000 at the end of 1st,2nd,3rd year
respectively. The interest rate or discount rate assumed is 10% i.e. r = 10%.

Present Value of Cash inflows (i.e.Today what you receive) = P.V. of 30000 (actually
received at the end of 1st year) + P.V. of 40000 (actually received at the end of 2 nd year)
+ P.V. of 50000 (actually received at the end of 3rd year) + P.V. of 26620 (actually
received at the end of 3rd year)

P.V. of cash inflows = 30000/(1+r/100)1 + 40000/(1+r/100)2 +50000/(1+r/100)3

+26620/(1+r/100)3
P.V. of cash inflows = 30000/(1.1)1 + 40000/(1.1)2 +50000/(1.1)3 +26620/(1.1)3
Page 7 of 44
 = (30000/1.1) + (40000/1.21) +(50000/1.331)
+(26620/1.331)
= 27272.72727 + 33057.85123 + 37565.74004 + 20000
= 1,17,896.3185
Present Value of Cash outflows (i.e.Today what you spent) = Rs.1,00000 (spent today
itself) + P.V. 12100 (actually spent at the end of 2nd year)

P.V. of cash outflows = 100000/(1+r/100)0 + 12100/(1+r/100)2 =

100000/(1.1)0 + 12100/(1.1)2 = 100000 + 10000 = 110000

N.P.V. = P.V. of all cash inflows - P.V. of all cash outflows

N.P.V. = 1,17,896.3185 - 1,10,000
N.P.V. = Rs.7,896.3185

Conclusion i.e. Today you received Rs.1,17,896.31 and

today you paid Rs.1,10,000,
hence you are available with a profit of Rs.7,896.31 as of today itself.

Relationship between interest rate and N.P.V.

As the interest rate increases the N.P.V. decreases. Check the same by increasing the
interest rate from 10% to 15% for the above example. At 15% the NPV decreases
(Answer: NPV at 15% is -2437).

As the interest rate decreases the N.P.V. increases. Check the same by decreasing the
interest rate from 10% to 5% for the above example. At 5% the NPV increases
(Calculate at your end and confirm this).

Internal Rate Of Return (I.R.R.):

We already know that As the interest rate increases the N.P.V. decreases. That means
for the above example when we increase the interest rate or discount rate from 10% to
a higher rate of interest then the NPV starts declining and at some point of time, at
some higher % interest rate, the NPV becomes rupees ZERO. This % interest rate itself
is called as IRR. IRR is that % discount rate Or % interest rate at which N.P.V. is zero.

In other words IRR is that % discount rate Or % interest rate at which P.V. of all cash
Page 8 of 44
inflows are equal to P.V. of all cash outflows (LOGIC: That is why the NPV is zero)
Conclusion i.e. IRR is that % interest rate or % discount rate at which
(What you receive Today is equal to
What you spend Today, hence there is no loss no profit as of today)
(i.e. Present Value of all cash inflows is equal to
Present Value of all cash outflows)

Example:
In a business proposal Rs.12100 has to be received (Cash Inflow) at the end of 2nd year and
Rs.9900 has to be paid (Cash Outflow) at the end of 1st year.
(i) Find N.P.V at 10%
(ii) Find N.P.V at 20%
(iii) Find N.P.V. at 30%

Net Present Value = P.V. of all cash inflows P.V. of all cash outflows

------------------------------------------------------
N.P.V at 10% = 12100/(1+10/100)2 9900/(1+10/100)1
N.P.V at 10% = 10000 9000
N.P.V at 10% = 1000
10% can be considered as LOWER interest rate since we have positive NPV of +1000
rupees

---------- OR ----------

N.P.V at 20% = 12100/(1+20/100)2 9900/(1+20/100)1

N.P.V at 20% = 8402.77 8250
N.P.V at 20% = 152.77
20% also can be considered as LOWER interest rate there also exist positive NPV of
+152.77 rupees
------------------------------------------------------
N.P.V at 30% = 12100/(1+30/100)2 9900/(1+30/100)1
N.P.V at 30% = 7159.76 7615.38
N.P.V at 30% = -455.62
30% can be considered as HIGHER interest rate since we have negative NPV of -
455.621302 rupees

As the interest increased from 10% to 20%, the NPV decreased.

As the interest increased from 20% to 30%, the NPV further decreased
Page 9 of 44
Conclusion: Somewhere between 20% and 30% at some ----% interest rate the NPV is
zero because at 20% the NPV is +152.77 whereas at 30% the NPV is -455.62 i.e. NPV =
zero (at some ----% interest rate) has already been crossed thats why the NPV at 30% is
negative.
IRR = L % rate + (H % rate L % rate) * ( NPV at L% / (NPV at L% - NPV at H%) )
= 20 + (30 20)* 152. .77 / 152.77 (-455.621302)
= 20 + (10)* 152. 77 / 152.77 + 455.62
= 20 + (10)* 152. 77 / 608.39
= 22.2%

Let us find out the NPV at the % IRR (i.e. % interest rate at which NPV is zero)

N.P.V at 22.222% = 12100/(1+22.511/100)2 9900/(1+22.511/100)1

N.P.V at 22.222% = 8100 8100

Let us learn the concept of IRR from one more example. First up all we will find the
NPV of the following project by assuming an interest rate of 8%.
For example, today you purchased (Cash Outflow) Rs.1,00000 worth of machinery. You
spent (Cash Outflow) Rs.12100 at the end of 2nd year for repairs and maintenance. Your
business revenues (Cash Inflow) were Rs.22000, Rs.36300, and Rs.66550 at the end of
1st,2nd,3rd year respectively. You sold (Cash Inflow) the machine for Rs.13,310 at the end
of 3rd year. The interest rate or discount rate assumed is 8% i.e. r = 8%.

Present Value of Cash inflows (i.e.Today what you receive) = P.V. of 22000 actually
received at the end of 1st year + P.V. of 36300 actually received at the end of 2nd year +
P.V. of 66550 actually received at the end of 3rd year + P.V. of 13310 actually received at
the end of 3rd year.

P.V. of cash inflows = 22000/(1+r/100)1+ 36300/(1+r/100)2 +66550/(1+r/100)3 +13310/(1+r/100)3

P.V. of cash inflows = 22000/(1.08)1 + 36300/(1.08)2 +66550/(1.08)3 +13310/(1.08)3
P.V. of cash inflows = 22000/1.08 + 36300/1.1664 +66550/1.259712 +13310/1.259712
= 20370.37 + 31121.399 + 52829.535 + 10565.90
= 114887.204

Present Value of Cash outflows (i.e.Today what you spent) = Rs.1,00000 (spent today
itself) + P.V. 12100 actually spent at the end of 2nd year
Page 10 of 44
P.V. of cash outflows = 100000/(1+r/100)0 + 12100/(1+r/100)2 =100000/(1.08)0 + 12100/(1.08)2
= 100000 / 1 + 12100/1.1664
= 100000 + 10373.799
= 110373.799
N.P.V. = P.V. of all cash inflows - P.V. of all cash outflows
N.P.V. = 114887.204 - 110373.799
N.P.V. = Rs.4513.405
Conclusion i.e. Today you received Rs.114887.204 and
today you paid Rs.110373.799,
hence you are available with a profit of Rs.4513.405 as of today itself.

For 8% interest rate the NPV is +4513.405 since the present value of all cash inflow is
114887.204 whereas the present value of all cash outflow is 110373.799 hence there
exist a positive NPV of +4513.405

NPV at 8% is +4513.405. If we increase the rate from 8% to 12% then the NPV has to
decrease from +4513.405 to some other lesser value. Let us check this i.e. let us find
out NPV at 12%

P.V. of cash inflows = 22000/(1+r/100)1 + 36300/(1+r/100)2 +66550/(1+r/100)3 +13310/(1+r/100)3

1
P.V. of cash inflows = 22000/(1.12) + 36300/(1.12)2 +66550/(1.12)3 +13310/(1.12)3
P.V. of cash inflows = 22000/1.12 + 36300/1.2544 +66550/1.404928 +13310/1.404928
=19642.857 + 28938.137 + 47368.975 + 9473.795
= 105423.764

P.V. of cash outflows = 100000/(1+r/100)0 + 12100/(1+r/100)2

0
=100000/(1.12) + 12100/(1.12)2
= 100000 / 1 + 12100/1.2544
= 100000 + 9646.045
= 109646.045
N.P.V. = P.V. of all cash inflows - P.V. of all cash outflows
N.P.V. = 105423.764 - 109646.045
N.P.V. = -Rs.4222.281
Conclusion i.e. Today you spent Rs. 109646.045 and
today you received Rs.105423.764,
hence you are available with a loss of -Rs.4222.281 as of today itself.

NPV at 8% is +4513.405 whereas NPV at 12% is -Rs.4222.281, As the interest rate

increased from 8% to 12% the NPV declined from +4513.405 to -Rs.4222.281, This
indicates that the NPV is rupees zero at some interest rate between 8% to 12% (i.e.
Page 11 of 44
rupees zero between +4513.405 to -Rs.4222.281) and that % interest rate is IRR. Let us
find out that % IRR using this 8% (i.e. lower interest rate) and 12% (i.e. higher interest
rate) since we are sure that the IRR is between 8% to 12%.

IRR = L % rate + (H % rate L % rate) * ( NPV at L% / (NPV at L% - NPV at H%) )

IRR = 8 + (12 8) * (4513.405 / (4513.405 (-4222.281) )
IRR = 8 + (12 8) * (4513.405 / (4513.405 + 4222.281 )
IRR = 8 + (4) * (4513.405 / 8735.686 )
IRR = 10%
i.e. at 10 %, the NPV is zero for this business project OR
at 10 %, the P.V. of all cash inflows is equal to the P.V. of all cash outflows.

(A)Exercise: We are claiming that at 10 %, the NPV is zero, then prove the same
mathematically i.e. Prove N.P.V. of rupees zero at 10 %
P.V. of cash inflows = 22000/(1+r/100)1 + 36300/(1+r/100)2 +66550/(1+r/100)3
+13310/(1+r/100)3 (Note: here r = 10% )

P.V. of cash inflows = 22000/(1.1)1 + 36300/(1.1)2 +66550/(1.1)3 +13310/(1.1)3

P.V. of cash inflows = (22000/1.1) + (36300/1.21) +(66550/1.331) +(13310/1.331)

P.V. of cash inflows = 20000 + 30000 + 50000 + 10000

= 110000

Present Value of Cash outflows (i.e.Today what you spent) = Rs.1,00000 (spent today
itself) + P.V. 12100 actually spent at the end of 2nd year

P.V. of cash outflows = 100000/(1+r/100)0 + 12100/(1+r/100)2

=100000/(1.1)0 + 12100/(1.1)2
=(100000/1) + (12100/1.21)
= 100000 + 10000
= 110000
N.P.V. = P.V. of all cash inflows - P.V. of all cash outflows
N.P.V. = 110000 - 110000
Page 12 of 44
N.P.V. = ZERO

One more example on Internal Rate of Return (I.R.R.)

(A). You are going to receive (Cash Inflow) Rs.121 at the end of 2 nd year. You are going
to pay (Cash outflow) Rs.96 at the end of 1st year. Find I.R.R.

Answer:
Let me check NPV at 10% for the purpose of LOWER interest rate
Net Present Value = P.V. of ALL cash inflows P.V. of ALL cash outflows
N.P.V. at 10% = 121 / (1+10/100)2 - 96 / (1+10/100)1
N.P.V. at 10% = 100 - 87.272727
N.P.V. at 10% = + 12.727272727272727 rupees
10% can be considered as LOWER interest rate since we have positive NPV of +12.7272
rupees

Let me check NPV at 15% for the purpose of HIGHER interest rate
Net Present Value = P.V. of ALL cash inflows P.V. of ALL cash outflows
N.P.V. at 15% = 121 / (1+15/100)2 - 96 / (1+15/100)1
N.P.V. at 15% = 91.49338374291115 - 83.47826086956522
N.P.V. at 15% = + 8.015 rupees
15% cannot be considered as HIGHER interest rate since we have positive NPV of
+8.015 rupees

Let me check NPV at 30% for the purpose of HIGHER interest rate
Net Present Value = P.V. of ALL cash inflows P.V. of ALL cash outflows
N.P.V. at 30% = 121 / (1+30/100)2 - 96 / (1+30/100)1
N.P.V. at 30% = 71.59763313609467 - 73.8461538461538461
N.P.V. at 30% = -2.248520710059176 rupees
30% can be considered as HIGHER interest rate since we have negative NPV of -2.2485
rupees

IRR = L % rate + (H % rate L % rate) * ( NPV at L% / (NPV at L% - NPV at H%) )

IRR=10+(3010)*(12.72/(12.72(-2.248520710059176) ))
IRR= 10 + (20)* (12.72/(12.72+2.24))
IRR = 10 + (20) * (12.72/14.97)
IRR = 26.99
Page 13 of 44
Let me check NPV at IRR % rate of 26.99%
Net Present Value = P.V. of ALL cash inflows P.V. of ALL cash outflows
N.P.V. at 26.99% = 121/(1+26.99/100)2-96/(1+26.99/100)1
N.P.V. at 26.99% = 75 - 75
N.P.V. at 26.99% = 0 rupees

Conclusion: At IRR % rate of interest the NPV is equal to rupees zero.

(B)Exercise: As per the calculation, the IRR of the above project is 26.99%. The cost of
capital (borrowing) is 30% (Or the bank lending rate is 30%). Should the lender lend for
this business project?
Answer: At 26.99% the NPV is zero and as the rate of interest increases the NPV
decreases. That means any % interest rate greater than 26.99% will give us with
negative NPV (the NPV at 30% is - 2.2485 rupees as per the above calculation). Hence
the lender (Or the bank) should not lend for this business project at 30%.

(C)Exercise: As per the calculation, the IRR of the above project is 26.99%. The cost of
capital (borrowing) is 10% (Or the bank lending rate is 30%). Should the lender lend for
this business project?
Answer: At 26.99% the NPV is zero and as the rate of interest decreases the NPV
increases. That means any % interest rate lesser than 26.99% will give us with positive
NPV (the NPV at 10% is +12.7272 rupees as per the above calculation). Hence the
lender (Or the bank) can lend for this business project at 10%.

(D) In an investment project the NPV is +5000 at 10% interest rate whereas the NPV is
+100 at 20% interest rate. What is your conclusion for the purpose of IRR? What will
be the banks decision if the lending rate is 15%?

(E) In an investment project the NPV is -100 at 15% interest rate whereas the NPV is -
5000 at 25% interest rate. What is your conclusion for the purpose of IRR? What will
be the banks decision if the lending rate is 18%?

(F) In an investment project the NPV is +100 at 8% interest rate whereas the NPV is -
500 at 17% interest rate. What is your conclusion for the purpose of IRR? The required
rate of return expected by investor Mr.A is 7%. What will be his decision?
Page 14 of 44
(G) IRR of project A is 10% whereas IRR of project B is 20%. Which project is good to
invest?

Answer:

(D) IRR is above 20%. At 15%, the NPV will be positive hence the bank can lend.

(E) IRR is less than 15%. At 18%, the NPV will be negative hence the bank cannot
lend.

(F) IRR is between 8% and 17%. At 7%, the NPV will be positive hence Mr.A can invest
in this investment project.

(G) IRR of project A is 10%. That means as the interest rate increases the NPV
decreases i.e. NPV will be negative.

(A) Exercise: One more example:

In a business proposal Rs.12100 has to be received at the end of 2nd year and Rs.9900
has to be paid at the end of 1st year.
(A.1) Find I.R.R. by considering 10% as lower rate of interest and 25% as higher
rate of interest
(A.2) Can 25% be taken as lower rate of interest (i.e. L) for the purpose of
calculate of IRR?
(A.3) Can 10% be taken as higher rate of interest (i.e. H) for the purpose of
calculate of IRR?
(A.4) Is it possible to find I.R.R. by considering 5% as lower rate of interest and
30% as higher rate of interest? If YES then find IRR accordingly and compare this
answer with the answer of the above (A.1)
Answer:
(A.1) I.R.R is equal to 22.76
(A.2) LOWER rate of interest must result into + POSITIVE NPV. Since we have got
negative NPV at 25% we cannot consider 25% as LOWER rate of interest.
(A.3) HIGHER rate of interest must result into - NEGATIVE NPV. Since we have got
positive NPV at 10% we cannot consider 10% as HIGHER rate of interest.
(A.4) YES, definitely, it also provides with same % IRR since Mathematics is science.

Present Value of Annuity and Future Value of Annuity:

We already know that,
Page 15 of 44
Maturity Amount Or Future Value = P * ( 1 + r / 100 ) n
Maturity Amount Or Future Value = Present Value * ( 1 + r / 100 ) n
Present Value * ( 1 + r / 100 ) n = Maturity Amount
(Note: Principle amount i.e. P, has to be considered as PRESENT VALUE because
principle amount is invested as on TODAY )

Annuities may be defined as same amount of money installment whether daily or

monthly or half yearly or quarterly or annually either as payment- installments or as
receipts- installments.
There exist two types of annuities:
(i) Ordinary Annuity OR Regular Annuity (when the instalment is made at the end
of each instalment period)
(ii) Annuity-Due (when the instalment is made at the beginning of each instalment
period)

In this context we face four situations:

(1). Present value of ordinary / regular annuity i.e. when present value has to be
calculated for the installment done at the end of each period.
(2). Future value (i.e. maturity amount) of ordinary / regular annuity i.e. when future
amount has to be calculated for installment done at the end of each period.
(3). Present value of annuity due i.e. when present value has to be calculated for the
installment done at the beginning of each period.
(4). Future value (i.e. maturity amount) of annuity due i.e. when future amount has
to be calculated for installment done at the beginning of each period.

Let us discuss all the above (1),(2),(3) and (4) with real life examples.

(1). You are going to receive an amount of Rs.100 at the end of each year for the next
3 years i.e. ordinary / regular annuity. Find out the present value of these three
annual installments of Rs.100 received at the end of each year. Assume your required
rate of interest of 10%.

i.e. = Present value(i.e. today) of Rs.100 received at the end of first year + Present
value(i.e. today) of Rs.100 received at the end of second year + Present value(i.e.
today) of Rs.100 received at the end of third year

Page 16 of 44
Present value(i.e. today)=Rs.100/(1+r/100)1 + Rs.100 / (1+r/100)2 + Rs.100 / (1+r/100)3
Present value(i.e. today)=Rs.100/(1.1)1 + Rs.100 / (1.1)2 + Rs.100 / (1.1)3
Present value(i.e. today)=Rs.100/(1.1) + Rs.100 / (1.21) + Rs.100 / (1.331)
Present value(i.e. today)=Rs.90.90 + Rs.82.64 + Rs.75.13
Present value(i.e. today)=Rs.249

Let us calculate the above exercise using formula and cross check the answers.
1
P.V. of Ordinary / regular Annuity = Annuity * 1 - ( 1 + r/100 )n
r/100

Present Value of Ordinary / regular Annuity = 100 [ 1 - 1 / (1.10)3 / 0.10 ]

= 100 [ 1 - 1 / 1.331 / 0.10 ]
= 100 [ 1 - 0.331 / .10 ]
= 100 [ 1 - 0.751 / .10 ]
= 100 [ 0.249 / .10 ]
= 100 [2.49]
= Rs.249

(2). You are going to receive equal amount of Rs.100 at the beginning of each year for
the next 3 years i.e. annuity due. Find out the present value of these three annual
installments of Rs.100 received at the beginning of each year. Assume your required
rate of return of 10%.

i.e. = Present value(i.e. today) of Rs.100 received today itself i.e. at the beginning of 1st
year + Present value(i.e. today) of Rs.100 received at the beginning of second year +
Present value(i.e. today) of Rs.100 received at the beginning of third year

Page 17 of 44
Present value(i.e. today)=Rs.100/(1+r/100)0 + Rs.100 / (1+r/100)1 + Rs.100 / (1+r/100)2
Present value(i.e. today)=Rs.100/(1) + Rs.100 / (1.1) + Rs.100 / (1.21)
Present value(i.e. today)= Rs.100 + Rs.90.90 + Rs.82.64
Present value(i.e. today)= Rs.274

Let us calculate the above exercise using formula and cross check the answers.
1
Present Value of Annuity Due = Annuity * 1 - ( 1 + r/100 )n
r/100 *( 1 + r/100 )

Present Value of Annuity Due = 100 [ 1 - 1 / (1.10)3 / 0.10 ] * (1.1)

= 100 [ 1 - 1 / 1.331 / 0.10 ] * (1.1)
= 100 [ 1 - 0.331 / .10 ] * (1.1)
= 100 [ 1 - 0.751 / .10 ] * (1.1)
= 100 [ 0.249 / .10 ] * (1.1)
= 100 [2.49] * (1.1)
= 100 * 2.739
= Rs.274

(3). You are going to pay instalment of Rs.100 at the end of each year for next 3
years i.e. ordinary / regular annuity. Find out the future value of these three annual
installments of Rs.100 paid at the end of each year. Assume your required rate of
return of 10%.

i.e. = Future value of Rs.100 paid at the end of first year + Future value of Rs.100 paid
at the end of second year + Future value of Rs.100 paid at the end of third year(i.e. F.V.
on that same day itself)

Future value = Rs.100*(1+r/100)2 + Rs.100*(1+r/100)1 + Rs.100*(1+r/100)0

Future value = Rs.100*(1.1)2 + Rs.100*(1.1)1 + Rs.100*(1.1)0
Future value = Rs.100*(1.21) + Rs.100*(1.1) + Rs.100*(1)
Future value = Rs.121 + Rs.110 + Rs.100
Page 18 of 44
Future value at the end of 3rd year= Rs.331

Let us calculate the above exercise using formula and cross check the answers.

Future Value of Ordinary / regular Annuity = Annuity * (1 + r/100 ) n -1

r/100

Future Value of Ordinary / regular Annuity = 100 [ (1.10)3 -1 / .10 ]

= 100 [ 1.331 -1 / .10 ]
= 100 [ 0.331 / .10 ]
Future Value of Ordinary / regular Annuity = 331

(4). You are going to pay instalment of Rs.100 at the beginning of each year for the
next 3 years i.e. annuity due. Find out the future value of these three annual
installments of Rs.100 paid at the beginning of each year. Assume your required rate of
return of 10%.

i.e. = Future value of Rs.100 paid at the beginning of first year + Future value of Rs.100
paid at the beginning of second year + Future value of Rs.100 paid at the beginning of
third year

Future value = Rs.100*(1+r/100)3 + Rs.100*(1+r/100)2 + Rs.100*(1+r/100)1

Future value = Rs.100*(1.1)3 + Rs.100*(1.1)2 + Rs.100*(1.1)1
Future value = Rs.100*(1.331) + Rs.100*(1.21) + Rs.100*(1.1)
Future value = Rs.133.1 + Rs.121 + Rs.110
Future value = Rs.133.1 + Rs.121 + Rs.110
Future value = Rs.364.1

Let us calculate the above exercise using formula and cross check the answers.

Future Value of Annuity Due = Annuity * (1 + r/100 ) n - 1 *( 1 + r/100 )

r/100
Page 19 of 44
Future Value of Annuity Due = 100 [ (1.10)3 -1 / .10 ] * (1.1)
= 100 [ 1.331 -1 / .10 ] * (1.1)
= 100 [ 0.331 / .10 ] * (1.1)
= 364.1

(1).The instalment paid is Rs.10000 of ordinary / Regular Annuity for next 3 years.
The insurance company is paying a maturity amount of Rs.32500 at the end of 3rd year
(i). Mr. A is an investor expecting 8% return
(ii). Mr. B is an investor expecting 10% return
What will be decision of Mr.A and Mr.B?
(2). The single premium amount to be paid at the beginning is Rs.3,00000. The
maturity amount at the end of 3rd year is Rs.3,70000
(i). Mr. C is an investor expecting 7% return
(ii). Mr. D is an investor expecting 8% return
What will be the decision of Mr.C and Mr.D?

Answer (1) : Mr.A will invest since as per his required rate of return of 8% he should
get Rs.32464 as maturity amount but in reality he is getting Rs.32500 as maturity
amount. Mr.B will not invest since as per his required rate of return of 10% he should
get Rs.33100 as maturity amount but in reality he is getting Rs.32500 as maturity
amount.

Answer (2) : Mr.C will invest since as per his required rate of return of 7% he should
get Rs.367500 as maturity amount but in reality he is getting Rs.3,70000 as maturity
amount. Mr.D will not invest since as per his required rate of return of 8% he should
get Rs.377910 as maturity amount but in reality he is getting Rs.3,70000 as maturity
amount.

(4.1) Find Present Value Investment Factor for Annuity-Due at 20% for 3 year (PVIFAD)
(4.2) Find Future Value Investment Factor for Annuity-Due at 5% for 3 year (FVIFAD)
(4.3) Find Present Value Investment Factor for Ordinary / Regular Annuity at 15% for 3
year (PVIFA)
(4.4) Find Present Value Investment Factor for a single lump sum amount at 10% for 3
year (PVIF)
(4.5) Find Future Value Investment Factor for Ordinary / Regular Annuity at 9% for 2
year (FVIFA)

Page 20 of 44
Answer: Cross check your answer with respective tables factor given in this
document.

Present Value and Future Value when compounding is done

based on yearly / quarterly / half-yearly / monthly / daily
basis:

Hint: n has to be multiplied by 1,2,4,12,365 basis when the

compounding is done on yearly, half-yearly, quarterly, monthly, daily basis
respectively.
r/100 has to be divided by 1,2,4,12,365 basis when the compounding
is done on yearly, half-yearly, quarterly, monthly, daily basis respectively.
So that the multiplication done to n can be compensated by the division done to
r/100

(1). Find the future value at the end of 3rd year of Rs.100 invested today when
compounding is done on yearly, half-yearly, quarterly, monthly, daily basis
assuming 10% rate of interest.
F.V. (yearly compounding) = 100 * (1 + 10/100 )3 = 133.10
F.V. (half-yearly compounding) = 100 * (1 + [ 10/100 / 2 ])3 * 2 = 134.01
F.V. (quarterly compounding) = 100 * (1 + [ 10/100 / 4 ])3 * 4 = 134.49
F.V. (monthly compounding) = 100 * (1 + [ 10/100 / 12 ])3 * 12 = 134.82
F.V. (daily compounding) = 100 * (1 + [ 10/100 / 365 ])3 * 365 = 134.98

(2). Find the present value of Rs.100 to be received at the end of 3rd year when
compounding is done on yearly, half-yearly, quarterly, monthly, daily basis
assuming 10% rate of interest.
P.V. (yearly compounding) = 100 / (1 + 10/100)3 = 75.13
P.V. (half-yearly compounding) = 100 / (1 + [ 10/100 / 2 ])3 * 2 = 74.62
P.V. (quarterly compounding) = 100 / (1 + [ 10/100 / 4 ])3 * 4 = 74.36
P.V. (monthly compounding) = 100 / (1 + [ 10/100 / 12 ]) 3 * 12 = 74.17
P.V. (daily compounding) = 100 / (1 + [ 10/100 / 365 ])3 * 365 = 74.08

Page 21 of 44
(Note: The above formulas are also applicable when calculating present values OR
future values of annuities if you are calculating each instalment/annuities separately
and then adding them to get the future or present values of annuities)

Exercise (1). Find out the FUTURE VALUE of Rs.20000 invested for 3 years at 10%
based on half yearly compounding.
Future Value based on half-yearly compounding :
Future Value = P ( 1 + [ r /100 / 2] )n*2
Future Value = 20000 ( 1 + [ 10/100 / 2] )3*2
Future Value = 26,801.91

Exercise (2). Find out the PRESENT VALUE of Rs. 26801.91 to be received at end of 3rd
year at 10% based on half yearly compounding.
Present Value based on half-yearly compounding :
Present Value = Future Value / ( 1 + [ r /100 / 2] )n*2
Present Value = 26,801.91 / ( 1 + [ 10/100 / 2] )3*2
Present Value = 20,000

Exercise (3). Find out the FUTURE VALUE of an ordinary annuity of Rs.20000 invested
for 3 years at 10% based on half yearly compounding.

Exercise (4). Find out the PRESENT VALUE of an annuity-due of Rs.20000 invested for
3 years at 10% based on half yearly compounding.

Investment Factor Tables for rupees one:

All the investment factor tables for _____ % rate of interest for ______ number of years
has been done for rupees one only.
Let us interpret them one by one
(1). PVIF (Present Value Investment Factor) TABLE for a lump sum amount:
i.e. Present Value of Rs.1 to be received at the end of ____ th year at _____ % rate of
interest.

(2). PVIFA (Present Value Investment Factor) TABLE for ordinary / Regular Annuity :
i.e. Present Value of Rs.1 annuity to be received at the end of each year for the next
____ years at _____ % rate of interest.
Page 22 of 44
(3). PVIFAD (Present Value Investment Factor) TABLE for annuity due :
i.e. Present Value of Rs.1 annuity to be received at the beginning of each year for the
next ____ years at _____ % rate of interest.

(4). FVIF (Future Value Investment Factor) TABLE for a lump sum amount:
i.e. Future Value of Rs.1 invested today at _____ % rate of interest at the end of ___
year.

(5). FVIFA (Future Value Investment Factor) TABLE for ordinary / Regular Annuity :
i.e. Future Value of Rs.1 annuity invested at the end of each year for the next ____
years at _____ % rate of interest.

(6). FVIFAD (Future Value Investment Factor) TABLE for annuity due :
i.e. Future Value of Rs.1 annuity invested at the beginning of each year for the next
____ years at _____ % rate of interest.

Let us discuss some EXAMPLES for the above TABLES (1),(2),(3),(4),(5),(6)

(1). PVIF for Rs.1 to be received at the end of 3rd year at 10% is Rs.0.7513
Exercise: Find the present value of Rs.10000 to be received at the end of 3rd year at
10%.
Solution: Rs.10000 * 0.7513 = Rs.7513

(2). PVIFA for Rs.1 annuity to be received at the end of each year for next 3 years at
10% is Rs.2.4869
Exercise: Find the present value for ordinary / regular-annuity of Rs.1000 to be
received at the end of each year for next 3 years at 10%.
Solution: Rs.1000 * 2.4869 = Rs.2486.9

Page 23 of 44
(3). PVIFAD for Rs.1 annuity to be received at the beginning of each year for next 3
years at 10% is Rs.2.7355
Exercise: Find the present value for annuity-due of Rs.100 to be received at the
beginning of each year for next 3 years at 10%.
Solution: Rs.100 * 2.7355 = Rs.273.55

(4). FVIF of Rs.1 invested today, at the end of 3rd year at 10% is Rs.1.3310
Exercise: Find the future value of Rs.10000 invested today, at the end of 3rd year at
10%.
Solution: Rs.10000 * Rs.1.3310 = Rs.13310

(5). FVIFA of Rs.1 annuity invested at the end of each year for next 3 years at 10% is
Rs.3.3100
Exercise: Find the future value for ordinary / regular-annuity of Rs.1000 invested at
the end of each year for next 3 years at 10%.
Solution: Rs.1000 * 3.3100 = Rs.3310

(6). FVIFAD for Rs.1 annuity invested at the beginning of each year for next 3 years at
10% is Rs.3.6410
Exercise: Find the future value for annuity-due of Rs.100 invested at the beginning of
each year for next 3 years at 10%.
Solution: Rs.100 * 3.6410 = Rs.364.10

Page 24 of 44
Sinking Fund:
Money set aside in a special account to which Regular Annuity investments are made
at a specified compound interest rate with the plans that by a specified target date the
maturity amount so generated by these annuities will be exactly equal to the funds that
are required to meet the pre-defined financial goal / financial obligation.

(I) Let us understand the above definition with the help of below example (for
Annuity-Due).
You are planning to purchase a car worth of Rs.5 lakh at the end of 3rd year from today.
Then what amount of annuity-due (i.e. beginning of each year) that you are required
to invest for the next 3 years at compound interest rate of 10% so that the maturity
amount of your investment will be exactly equal to Rs.5 lakh at the end of 3rd year. This
will facilitates you to purchase your dream car of Rs.5 lakh exactly at the end of 3rd
year.

Rs.Annuity @ Rs.Annuity @ Rs.Annuity @

Start of 1st Year Start of 2nd Year Start of 3rd Year 3rd Year end

Page 25 of 44
Future (i.e. maturity) Value of an Annuity-Due (beginning)
of 1st Year, at the end of 3rd year at 10% compound interest
+

Future (i.e. maturity) Value of an Annuity-Due (beginning) = Rs.5 Lakhs at

of 2nd Year, at the end of 3rd year at 10% compound interest the end of
+ 3rd year

Future (i.e. maturity) Value of an Annuity-Due (beginning)

of 3rd Year, at the end of 3rd year at 10% compound interest

Annuity (1 + 10/100)3 + Annuity (1 + 10/100)2 + Annuity (1 + 10/100)1 = Rs. 5 Lakh

Annuity (1.331) + Annuity (1.21) + Annuity (1.1) = 5,00000

Annuity (1.331 + 1.21 + 1.1) = 5,00000

Annuity (1.331 + 1.21 + 1.1) = 5,00000

Annuity (3.641) = 5,00000

Annuity = 5,00000 / 3.641

Annuity = Rs.137324.91

CONCLUSION:

If you invest an annuity-due of Rs.137324.91 for the next 3 years at 10% then your
maturity amount (i.e. future value) will be Rs.5,00000 at the end of 3rd year. And with
this exact amount of Rs.5,00000, exactly at the end of 3rd year you can purchase your
dream car as was FINANCIALLY PLANNED for Rs.5,00000 at the end of 3rd year.

We already know that the table factor of Sinking fund - Future Value Annuity-Due,
for 3 years at 10% is 3.641. Therefore what will be the future value (i.e. maturity
amount) when the annuity-due of Rs.137324.91 has been invested for the next 3 years
at 10%???

i.e. = Rs.137324.91 * 3.641 = Rs.4,99999.99 = Rs.5,00000

Page 26 of 44
, hence our above CONCLUDED answer is correct.

The above procedure is quite tedious to calculate the annuity of Rs.137324.91. Hence
we have readymade formula to calculate this annuity of Rs.137324.91. Let us solve the
same problem using this readymade formula. The formula is as below.

r /100
Annuity-Due = M.Amount * ----------------- * (1 r / 100)
(1+r/100) n -1

Annuity-Due = 10 /100 1
5,00000 * ----------------- * --------------
(1+10/100) 3 -1 (1+10/100)

Annuity-Due = 5,00000 * (.1 / .331) * (1/1.1) = Rs.137324.91

Sinking Fund Factor (SFF) Table for rupees one:

We can also solve the above problem by referring to the readymade values calculated
for maturity amount of rupees one in Sinking Fund Factor Table. This investment
factor table of annuities for _____ % rate of interest for ______ number of years has
been achieved for sinking fund-maturity amount (i.e. future value) of rupees one.
Following i.e. SFF (Sinking Fund Factor) table tells us with the required annuity-due
(starting) instalment amount to be invested at ____% rate of interest when the
maturity amount (i.e. Future Value) of rupees one (This Rupees One is the required
sinking fund amount) has to be received at the end of ____th year.

Let us solve the very same above EXAMPLE using factor values provided in SFF TABLE

(1). SFF (i.e. annuity-due) for maturity amount (i.e. future value of) of Rs.1 to be
received at the end of 3rd year when annuity-dues (beginning of the year) are invested
at 10%, is 0.27465. This Rs.0.27465 is the annuity-due instalment amount sinking
fund factor as per the SFF table for annuity-due in this case.

Page 27 of 44
Solution: When the maturity amount is Rs.1 at the end of 3rd year then the annuity-due
instalment amount at 10% interest rate is Rs.0.27465 Therefore, when the maturity
amount is Rs.5,00000 at the end of very same 3rd year then what should be the
annuity-due instalment amount at the very same interest rate of 10% ???

Answer = Rs.0.27465/ Rs.1 * Rs.5,00000 = Rs.137325 is the annuity-due

instalment.
i.e. = Rs.137325 is the annuity-due instalment for the next 3 years at 10%.

(II) What if the instalment has been made at the end of each year
(i.e. ordinary / Regular Annuity) instead of beginning of each
year???
Let us solve this problem using the following formula for ordinary / regular-annuity.

r /100 10 /100
Ordinary / Regular Annuity = M.Amount * ----------------- = 5,00000 * ----------------------
(1+r/100)n -1 (1+10/100)3-1

Ordinary / Regular Annuity = Rs.151057.4015

(Note: S.F. Factor for Ordinary / Regular Annuity

for 3 years at 10% is Rs.0.302115. Hence,
Ordinary Annuity = Rs.5,00000 * 0.302115 = Rs.151057.5)

i.e. ordinary annuity of Rs.151057.4015 has to be invested annually at 10% to receive

Rs.500000 at the end of 3rd year.

Let us cross check the above answer. The Sinking Fund Factor Table for Ordinary
Annuity for 3 years at 10% is Rs.3.3100, hence,

Future Value = Rs.151057.4015 * 3.3100 = Rs.499999.99

Page 28 of 44
GENERAL INSTRUCTION (1): The Table Factor has to be always MULTIPLIED with
the required amount. The table provides us with the factor for Rs.1, hence our job is to
calculate the same for our required amount.

This perfectly works because all the remaining parameters like % rate of interest and
number of years are same for both rupees one and our required amount.

GENERAL INSTRUCTION (2): Normally the formulas are provided with annual
compounding i.e. per annum basis.

Now, for example, If you want to convert that (ANY) formula to monthly compounding
basis then just divided r/100 with 12 and then multiply the power of (1+r/100) with
12 i.e. (1+r/100)n*12.

Similarly for quarterly basis, half yearly basis and daily basis compounding, you need to
divide and multiply with 4, 6 and 365 respectively, as was explained above.

Lets think that you want to find out the present value of a lump sum amount when the
compounding is done on daily basis. Then the converted formula will be as below.

Present Value = Lump Sum Amount

(on daily basis compounding) -----------------------------
The compound interest on Rs.10,00000 (1 + (r/100 / 365)n*365
investment is 10%

Present Value of perpetuity:

Perpetuity is an infinite series of periodic instalment of equal amount. Here, constant
payment is to be made periodically for an infinite amount of time. Present value of
perpetuity is finite because the discounted value of far future payments of the
perpetuity reduces considerably and reaches close to zero.

Present Value of perpetuity = A / ( r/100)

Where A = Annual cash flow, r = rate of interest

Page 29 of 44
For example you would like to receive Rs.50,000 per year, forever. The interest rate is 10%. What is the
present value of the same as on today?

Present Value of perpetuity = 50,000 / ( 10 / 100 )

Present Value of perpetuity = Rs.5,00000

(Note: If you invest Rs.5,00,000 as principle amount then you will get Rs.50,000 per
annum perpetuity at 10% rate of interest)

Exercise: You would like to receive Rs.85,000 per annum forever at 12%. What is the
present value of the same OR what is the principle amount required to invest to
receive the same?

Rule 69 and 72:

A general rule estimating how long it will take for an investment to double, assuming
continuously compounding interest. One calculates this by dividing 69 by the rate of
return for rule 69 and by dividing 72 by the rate of return for rule 72.

(Note: Rule 69 provides precise answer in comparison with Rule 72)

Time required to double as per rule 69 = 0.35 + 69 / rate of interest

Time required to double as per rule 72 = 72 / rate of interest

For example how long does it take to double an investment amount if invested at 10%
rate of compound interest? Answer this question as per rule 69 and also rule 72.

Answer(1) : As per rule 69: = 0.35 + 69 / 10 = 7.25 years

Answer(2) : As per rule 72: = 72 / 10 = 7.2 years

Exercise: Find out the number of years required to double an amount when the
interest rate is 15% for rule-69 and rule-72 ?

Effective rate of interest:

An investments rate of interest calculated on an ANNUAL BASIS when compounding
occurs more often than once a year is called as effective rate of interest. Hence the
effective rate of interest is calculated and converted on an annual basis.

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For example, Rs.10,000 compounded half yearly basis at 10% per annum interest rate
(Since 10% is per annum basis it has been correctly divided by 2 and multiplied by 2 in
the formula), results into a maturity amount (future value) of rupees amount of
Rs.12155 when the term is two year. Now, with this same interest rupees amount of
Rs.2155 on this same principal amount of Rs.10000 for this same term of 2 years
calculated for yearly compounding basis results into an effective rate of
interest of 10.25%. (In other words Rs.10000 principal amount at compound rate of
10.25% compounded annually results into a maturity amount of Rs.12155 when the
duration is 2 years)

This calculation is achieved when P=Rs.10000, n= 2 year, Maturity Amount Or Future

Value(compounded half yearly basis) = Rs.12155, and r=????)

As per below solution the effective rate of interest is achieved (converted) on an

annual basis:
Maturity Amount = P ( 1 + r / 100 )n
12,155 = 10,000 ( 1 + r / 100)2
( 1 + r / 100)2 = 12,155 / 10000
( 1 + r / 100) 2 = 1.2155
( 1 + r / 100) = 1.1024971 (note: square root of 1.2155)
r = (1.1024971-1) * 100
r = (0.1024971) * 100
r = 10.24971
r = 10.25%
Effective rate of interest = 10.25%

Alternative Solution (using formula) is as below:

Effective rate of interest =
(1 + Actual rate of interest/Number of compounding in year)Number of compounding in a year -1

(1). Effective rate of interest when half yearly compounding exists for 10%:
Effective rate of interest = ( 1 + 0.10 / 2 ) 2 1 = ( 1 + 0.05 ) 2 - 1 = 1.1025 1 =
=0.1025 = 10.25%, i.e. 10.25 % is the effective rate of interest

(2). Effective rate of interest when quarterly compounding exists for 10%:
Effective rate of interest = ( 1 + 0.10 / 4 ) 4 1 = ( 1 + 0.025 ) 4 - 1 = 1.1038 1 =
Page 31 of 44
0.1038 = 10.38%, i.e. 10.38 % is the effective rate of interest

(3). Effective rate of interest when monthly compounding exists for 10%:
Effective rate of interest = ( 1 + 0.10 / 12 ) 12 1 = ( 1 + 0.0083 ) 12 - 1 = 1.1047 1 =
0.1047 = 10.47%, i.e. 10.47 % is the effective rate of interest

(4). Effective rate of interest when monthly compounding exists for 10%:
Effective rate of interest = ( 1 + 0.10 / 365 ) 365 1 = ( 1 + 0.0002739 ) 365 -1 =
1.1052 1 = 0.1052 = 10.52%, i.e. 10.52 % is the effective rate of interest

Conclusion: From the above (1),(2),(3) and (4) you can conclude that the effective rate
of interest will be more when the compounding is done on daily basis in comparison
with yearly, half yearly, quarterly compounding basis.

If you are taking LOAN then the annual compounding is preferred since the effective
rate of interest works out to be lower % compound rate of interest.
If you are INVESTING then the daily compounding is preferred since the effective rate
of interest works out to be higher % compound rate of interest.

(A) Exercise: The maturity amount is Rs.11025 for principle amount of Rs.10000 at 10%
rate of interest compounded half yearly basis when the term is 1 year. Now find
effective rate of interest.
Answer (1) (Now the compounding has to be achieved for YEARLY basis):
Maturity Amount = P ( 1 + r / 100 )n
11,025 = 10,000 ( 1 + r / 100)1
( 1 + r / 100)1 = 11,025 / 10000
1 + r / 100 = 1.1025
r = (1.1025-1) * 100
r = 0.1025 * 100
r = 10.25 %
Effective Rate of Interest = 10.25 %
OR
Answer (2) Effective rate of interest =
(1 + Actual rate of interest/Number of compounding in year)Number of compounding in a year -1

Effective rate of interest when half yearly compounding exists for 10%:
Effective rate of interest = ( 1 + 0.10 / 2 ) 2 1 = ( 1 + 0.05 ) 2 - 1 = 1.1025 1 =
=0.1025 = 10.25%, i.e. 10.25 % is the effective rate of interest

S.B. A/c interest calculation as per DAILY PRODUCT

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METHOD :
Exercise(1.1). Mr Ashok has savings bank account with PQR Bank Ltd. He has balance of
Rs.20,000 as on 1-5-2015. His transactions during that month are (i) Deposit of
Rs.5,000 as on 11-5-2015. (ii) Withdrawal of Rs.15,000 as on 15-5-2015. (iii)
Withdrawal of Rs.3,000 as on 28-5-2015. The interest rate is 5% per annum.

Q.1:Find out the total interest amount for the month of May 2015 based on daily
product method (new method) as mandated by RBI effective from April 1 2010.
Q.2:Find out AVERAGE MONTHLY BALANCE maintained by Mr.Ahok.
Date Debited Credited Balance No of days Product
1-5-2015 20,000 10 days 2,00,000
11-5-2015 5,000 25,000 4 days 1,00,000
15-5-2015 15,000 10,000 13 days 1,30,000
28-5-2015 3,000 7,000 4 days 28,000
TOTAL 31 days 4,58,000
Hint:
From Date To Date No. of Days
1-5-2015 10-5-2015 10 days
11-5-2015 14-5-2015 4 days
15-5-2015 27-5-2015 13 days
28-5-2015 31-3-2015 4 days

Interest Amount=Total Product * r / 100 * 1 / 365 days

Interest Amount = 4,58,000 * 5 / 100 * 1/ 365
Interest Amount = Rs.62.7

(Note: 5% interest is for 365 days, therefore what is the interest for 31 days? i.e. the
supposed to be calculation is 5% * 31 days / 365 days. But the multiplication of 31 days
has already been achieved in (20K * 10 days + 25K * 4 days + 10K * 13 days + 7K * 4
days = 4,58,000 ) therefore DO NOT multiply 31 days one more time. Therefore the
application of 1 / 365 days is CORRECT and 31 / 365 is INCORRECT, in the above
formula)

Exercise(1.2). What is the MONTHLY AVERAGE BALANCE maintained in this S.B.

Account?
= Total Product / No. of days of that month
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 = 4,58,000 / 31 days = Rs.14,774.19

Exercise(2). What is the formula for calculating QUARTERLY AVERAGE BALANCE in S.B.
Account?
= Total Product / No. of days of that quarter.

Exercise(3). Mr. Kumaran has maintained savings bank account with PQR Bank Ltd for
last 5 years. His opening balance as on 1-1-2015 is zero rupees. He has deposited
Rs.31,000 as on 31-3-2015 in his bank account. Find out monthly average balance.
Date Debited Credited Balance No of days Product
1-1-2015 ZERO 30 days 0
31-1-2015 31,000 31,000 1 days 31,000
TOTAL 31 days 31,000

Monthly Average Balance = Total Product / No. of days of that month.

Monthly Average Balance maintained = 31,000 / 31 days
Monthly Average Balance maintained = Rs.1000

Exercise(4). Mr.Goyal has savings bank account with MNO Bank Ltd. The bank requires
him to maintain a monthly average balance of Rs.10,000 and quarterly average balance
of Rs.10,000. The fine for non-maintenance of monthly average balance is Rs.200 per
month and fines for non-maintenance of quarterly average balance is Rs.500 per
quarter. His transactions during the first QUARTER are (i). He has balance of Rs.3,000 as
on 1-1-2015. (ii) Deposit of Rs.4,000 as on 11-2-2015. (ii) Deposit of Rs.2,00,000 as on
15-3-2015. (iii) Withdrawal of Rs.1,000 as on 28-3-2015. The interest rate is 5% per
annum.

Q.1:Find out the total interest amount for first quarter of 2015 based on daily product
method (new method) as mandated by RBI effective from April 1 2010.
Q.2:Find out AVERAGE MONTHLY BALANCE for Jan 2015,Feb 2015 and March 2015.
Q.3:Find out AVERAGE QUARTERLY BALANCE.
Q.4:Calculate the penalty charges for non-maintenance of minimum average balance
for monthly and quarterly if any.
Date Debited Credited Balance No of days Product
1-1-2015 3,000 41 days 1,23,000
11-2-2015 4,000 7,000 32 days 2,24,000
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15-3-2015 2,00,000 2,07,000 13 days 26,91,000
28-3-2015 1,000 2,06,000 4 days 8,24,000
TOTAL 90 days 38,62,000
Hint:
From Date To Date No. of Days
1-1-2015 10-2-2015 41 days
11-2-2015 14-3-2015 32 days
15-3-2015 27-3-2015 13 days
28-3-2015 31-3-2015 4 days

Answer(1).Interest Amount=Total Product * r / 100 * 1 / 365 days

Interest Amount = 38,62,000 * 5 / 100 * 1/ 365
Interest Amount for the quarter = Rs.529.04

Answer(2).Monthly Average Balance = Total Product / No. of days of that month.

Monthly Average Balance for Jan 2015 = (3000 * 31 days) / 31 days = 3,000

Monthly Average Balance for Feb 2015 = (3000*10 days + 7000* 18 days) / 28 days
Monthly Average Balance for Feb 2015 = 5,571.42

Monthly Average Balance for March 2015 = (7000*14 days + 2,07000*13 days +
2,06,000*4 days) / 31 days
Monthly Average Balance for March 2015 = Rs.1,16,548.38

Answer(3). Quarterly Average Balance = Total Product / No. of days of that quarter
Quarterly Average Balance maintained from 1-1-2015 to 31-3-2015 =
= 38,62,000 / 90 days = 42911.11

Answer(4). Penalty charges for Jan 2015 and Feb 2015 is Rs.200 and Rs.200 respectively
for non-maintenance of minimum monthly average balance amount of Rs.10000. The
quarterly average balance of Rs.10,000 has been maintained hence there is NO penalty
charges on quarterly basis.

Exercise(5). From the following banking transactions of CURRENT ACCOUNT of

Mr.Lakhan in his bank account please calculate the interest amount payable for January
2015, on overdraft loan amount at 12.5%.

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Date Particulars Debit Credit Balance
1-1-2015 Opening Balance 10,000 +10,000
10-1-2015 Cash deposited 20,000 +30,000
12-1-2015 Cash withdrawn (overdraft) 35,000 -5,000
21-1-2015 Cash withdrawn (overdraft) 30,000 -35,000
Hint:
From Date To Date No. of Days
12-1-2015 20-1-2015 9 days
21-1-2015 31-1-2015 11 days
Answer:
Date Particulars Debit Credit Balance No. Of Days Product
1-1-15 Opening Balance 10,000 +10,000 ----------- ---------
10-1-15 Cash deposited 20,000 +30,000 ----------- ---------
12-1-15 Cash withdrawn 35,000 (5,000) 9 days (45,000)
21-1-15 Cash withdrawn 30,000 (35,000) 11 days (3,85,000)
Total (4,30,000)

Interest on overdraft =Total Product of all overdrafts * r/100 * 1 / 365 days

Interest on overdraft = 4,30,000 * 12.5/100 * 1/365 days
Interest amount on overdraft payable for Jan 2015 is = 147.26
Note (1). There is no interest paid by bank on current account
(2). Overdraft amount is like Loan given by bank to customer, hence
Receivable-Asset in the books of banking business
(3). Interest on O.D. is income whereas O.D. is Receivable-Asset for banking
business

Equated Monthly Instalment OR E.M.I. Calculation:

Page 36 of 44
Exercise (1.1) : Find out the EMI (Equated Monthly Instalment) for the
loan amount of 90000 taken for 5 months at 10%.
Exercise (1.2) : Also prepare the amortization schedule for the same.

Answer (1.1) :

E.M.I. = 18452.49
Answer (1.2) : Amortization Schedule for the EMI of Rs.18,452.49

Interest Amt. part of EMI for a given month = Latest Principle Amt. for that month * r

Where r = r / 100 / 12
Interest Amount part of EMI for Jan 2015 = 90,000 * 10/100 /12
Interest Amount part of EMI for Jan 2015 = 750

Interest Amount part of EMI for Feb 2015 = 72297.51 * 10/100 12/
Interest Amount part of EMI for Feb 2015 = 602.48

and so on.)

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 Amortization Schedule
S.No. Opening E.M.I. Interest Principle Closing
Balance(Principle) Amount Amount Balance(Principle)
Jan 2015 90000 18452.49 750 17702.49 72297.51
Feb 2015 72297.51 18452.49 602.48 17850.01 54447.5
Mar 2015 54447.5 18452.49 453.73 17998.76 36448.74
Apr 2015 36448.74 18452.49 303.74 18148.75 18299.99
May 2015 18299.99 18452.49 152.5 18299.99 ZERO

(2.1) E.M.I Amount = Interest Amount part of EMI + Principle Amount part of EMI

(2.2) Principle Amount part of EMI = E.M.I Amount - Interest Amount part of EMI

(2.3) Latest opening balance of Principle Amount = Immediate previous closing balance
of Principle Amount

Equated ANNUAL Instalment OR E.A.I. Calculation:

Exercise (1.1) : Find out the EAI (Equated Annual Instalment) for the
loan amount of 80,000 taken for 4 years at 10%.
Exercise (1.2) : Also prepare the amortization schedule for the same.

Answer (1.1) :

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Equated Annual Instalment (E.A.I) = Rs.25,237.39

Answer (1.2) : Amortization Schedule for the EMI of Rs.25,237.39

Interest Amt. part of EAI for a given month = Latest Principle Amt. for that year * r
Where r = r / 100
Interest Amount part of EAI for year 2015 = 80,000 * 10/100
Interest Amount part of EAI for year 2015 = 8,000

Interest Amount part of EAI for year 2016 = 62762.61 * 10/100

Interest Amount part of EAI for year 2016 = 6276.26

and so on.)

Amortization Schedule
Year Opening E.A.I. Interest Principle Closing
Balance(Principle) Amount Amount Balance(Principle)
2015 80000 25,237.66 8,000.00 17,237.66 62,762.34
2016 62,762.34 25,237.66 6,276.23 18,961.43 43,800.91
2017 43,800.91 25,237.66 4,380.09 20,857.57 22,943.34
2018 22,943.34 25,237.66 2,294.33 22,943.34 zero

(2.1) E.A.I Amount = Interest Amount part of EAI + Principle Amount part of EAI

(2.2) Principle Amount part of EAI = E.A.I Amount - Interest Amount part of EAI

(2.3) Latest opening balance of Principle Amount = Immediate previous closing balance
of Principle Amount

Exercise (3) Find E.A.I for loan amount of Rs.10000 taken for 3 years at 10% and
also prepare amortization schedule.
Amortization Schedule
Page 39 of 44
Year Opening E.A.I. Interest Principle Closing
Balance(Principle) Amount Amount Balance(Principle)
2015 10000 4,021.15 1,000.00 3,021.15 6,978.85
2016 6,978.85 4,021.15 697.89 3,323.26 3,655.59
2017 3,655.59 4,021.15 365.56 3,655.59 0.00

Exercise (4) Find E.M.I for loan amount of Rs.6000 taken for 3 months at 10% and
also prepare amortization schedule.
Amortization Schedule
S.No. Opening E.M.I. Interest Principle Closing
Balance(Principle) Amount Amount Balance(Principle)
Jan 2015 6000 2,033.43 50.00 1,983.43 4,016.57
Feb 2015 4,016.57 2,033.43 33.47 1,999.96 2,016.61
Mar 2015 2,016.61 2,033.43 16.81 2,016.61 zero

Difference between EMI and EAI:

(1). In EMI r = r/100/12 months
In EAI r = r/100
(2). In EMI n = no. of months
In EAI n = no. of years
(3). In EMI instalments are monthly basis. In EAI instalments are yearly basis.

Statistics:

Individual Series:
Individual series are those series where frequencies are not given.

Discrete Series:
The series dealing with the discrete variable is called Discrete Series. The discrete variable refers to that characteristic
which cannot be expressed in fractions or it is a frictionless variable. For example, number of employees. There will
be either one employee or two. There cannot be 1.5 employee or 2.95 employee etc.

Page 40 of 44
Continuous Series
Continuous Data can take any value. A continuous variable is one which can take on a value between any other two values, such as:
indoor temperature, time spent waiting, water consumed.

Simple Bar Diagram

1.

Simple bar diagrams Consists of vertical bars of equal width. The heights of these bars are proportional to the volume
or magnitude of the attribute. All bars stand on the same baseline. The bars are separated from each others by equal
intervals. The bars may be coloured or marked. For example number of students in section A, section B and section
C, are 57, 60 and 62.

Sub-Divided Bar Diagram

Sub-divided or component bar cha t is used to represent data in which the total magnitude is divided into different or
components.

In this diagram, first we make simple bars for each class taking total magnitude in that class and then divide these
simple bars into parts in the ratio of various components. This type of diagram shows the variation in different
components within each class as well as between different classes. Sub-divided bar diagram is also known as
component bar chart or staked chart.

ears Wheat Barley Oats Total

1991 34 18 27 79
1992 43 14 24 81
1993 43 16 27 86
1994 45 13 34 92

Page 41 of 44
Multiple Bar Diagram
If the data is classified by attributes and if two or more characters or groups are to be compared within each attribute
we use multiple bar diagrams. If only two characters are to be compared within each attribute, then the resultant bar
diagram used is known as double bar diagram.

The multiple bar diagram is simply the extension of simple bar diagram. For each attribute two or more bars
representing separate characters or groups are to be placed side by side. Each bar within an attribute will be marked
or coloured differently in order to distinguish them. Same type of marking or colouring should be done under each
attribute. A footnote has to be given explaining the markings or colourings.

Food grains (tones) Vegetables (tones) Others (tones)

Year
2000 100 30 10
2001 120 40 15
2002 130 45 25
2003 150 50 25
2004

Histogram
A histogram is a graphical representation of the distribution of numerical data. It is an estimate of the probability distribution of a
continuous variable (quantitative variable).
A histogram is a graphical method for displaying the shape of a distribution. It is particularly useful when there are a large number of
observations. We begin with an example consisting of the scores of 642 students on a psychology test. The test consists of 197 items,
each graded as "correct" or "incorrect." The students' scores ranged from 46 to 167.
Polygon

Is it a Polygon?
Page 42 of 44
Polygons are 2-dimensional shapes. They are made of straight lines, and the shape is "closed" (all the lines connect
up).

Polygon Not a Polygon Not a Polygon

(straight sides) (has a curve) (open, not closed)

Pie Diagram
This pie diagram is a simple template that provides a graphical, time-phased overview of a continuing sequence of stages, tasks, or
events in a circular flow.

Arithmetic Mean
Geometric Mean, Log x
Harmonic Mean

Median

Mode

(1). Following is the data related to units produced by workers of unit-I and unit-II
in a month. Which unit of production performed better?
Units produced 6 7 8 9 10
Number of workers 3 4 5 6 7

Units produced 6 7 8 9 10
Number of workers 5 6 8 7 6

(2). Following is the data related to marks scored by students of college ABC and
students of college PQR. Which colleges performance is good?
Marks scored between 50-60 60-70 70-80 80-90 90-100
Number of students 100 200 140 30 20

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Marks scored 50-60 60-70 70-80 80-90 90-100
Number of students 120 230 100 30 30

(3) Following is the percentage marks scored by five students in an exam.

Find the standard deviation of the same.
Marks scored by Student1 Student2 Student3 Student4 Student5
Number of students 68 72 49 57 89

(4). Following is the data related to marks scored by students of section-I and
section-II. Find out standard deviation in marks scored.
Marks scored between 50-60 60-70 70-80 80-90 90-100
Number of students 20 2 5 3 20

Marks scored 50-60 60-70 70-80 80-90 90-100

Number of students 4 5 32 6 3

Page 44 of 44