AN OVERVIEW OF BUSINESS MATHEMATICS: TIME VALUE OF MONEY

I) FUTURE / PRESENT VALUE CALCULATION (SINGLE CASH FLOW):

FVn = PV (1+ k)n k = (FV/PV)1/n 1 n = log (FV/PV) / log (1+k) FVn = PV x (1 + k/q)nq EIR = (1 + k/q)q -1

1. What will be the future value (FV) of Tk. 100 deposited today after 20 years at 10% annual

interest rate?
2. If your investment of Tk. 100 grows to Tk. 672.75 in 20 years, what percentage of interest

(k) you will earn on that account?

3. How many years (n) will it take for an investment to grow from Tk. 100 to grow to Tk.

672.75 @10%?
4. XYZ Bank Ltd. pays interest 10% per annum, compounded semi-annually (q). If you

deposit Tk. 100 in that bank, how much you will get after 3 years?
5. What is the present value (PV) of Tk. 20,000 available after 5 years at 10% annual interest

rate?
6. Calculate the effective interest rate (EIR) for an account yielding nominally 12% per annum,

compounded monthly.
II) FUTURE/ PRESENT VALUE OF AN ANNUITY (MULTIPLE, CONSTANT CASH FLOWS):

FVAn= PMT x [(1+k)n 1] / k FVAn= PMT x [(1+k/q)nq 1] / (k/q) PVAn= PMT x [1- 1/ (1+k)n] / k PVAn= PMT x [1- 1/ (1+k/q)nq] / (k/q) 7. You have decided to deposit Tk. 1,000 in a savings account at the end of each year for next 40 years of your working life. The money can be invested at an interest rate of 10% a year. What will be the future value of those annuities?
8. You have decided to save Tk. 1,000 in a savings account at the end of each month for next

40 years. The money can be invested at an interest rate of 10% a year. How much you will save (FVA) at the end of 40 years?
9. What is the present value (PVA) of the investment that will pay you Tk. 1,000 at the end of

each year for next 3 years? Assume interest rate will be 10% per annum.
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10. If you take out a Tk. 800,000 car loan for three years at an interest of 15%, who much you

will have to pay per month as installment (PMT)?

III) PRESENT VALUE CALCULATION: PERPETUITY WITH NO GROWTH

PV = PMT1 / k
11. What is the present value (PV) of an investment that will give you Tk. 12,000 at the end of

each year forever at 10% required return? Present value calculation: Perpetuity with constant growth PV = PMT1 / k - g
12. ABC Ltd.s common stock is expected to pay dividend of Tk. 10 a share at the end of the

first year. Thereafter, dividends are expected to grow at a rate of 5% a year forever. The required rate of interest is 10%. What should be the value (PV) of the share today?
IV) FUTURE / PRESENT VALUE CALCULATION (COMPLEX CASH FLOWS)

PVAn= PMT x [1- 1/ (1+k)n] / k PV = FV/ (1+ k)n

13.ABC Ltd. which has a 10% required return is considering a new investment. Because of the anticipated start-up delay, cash flow will be Tk. 1,000 at the end of each year for years 4 through 20 (PVA). That is the present value (PV) of those future cash flows? Solving problems using MS Excel Open MS Excel => Go to insert pull down menu => click on Function (fx) => select a category => Financial => try PV, FV, NPER, RATE, PMT formula. Try to solve all the problems using MS Excel.

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