Time value of money 1. A company purchases a fixed asset for Rs.4,00,000 by making a down payment of Rs.

1,00,000 and the remaining balance in equal instalments of Rs. 100000 for 4 years. What is the rate of interest applicable? 2. A ltd has 10,00,000, 8 % debentures redeemable after 5 years. The company plans to redeem debentures by establishing sinking fund, where company can earn 10 % p.a. What annual payment must the firm make to ensure, that the needed amount is available on the required date. 3. Mr. Rahim is planning for his retirement. He is 45 years old today, and would like to have Rs. 3,00,000 when he attains the age of 60. He intends to deposit a constant amount of money at 12 % each year in public provident fund in state bank of India to achieve his objective. How much money should he invest at the end of each year for the next 15 years to obtain Rs. 3,00,000 at the end of that period. 4. Reliance has to make a payment of 2 million (20,00,000) on 16th April 1998. It has a surplus money today ie. 15th Jan 1998 and the company has decided to invest in bank at 8 % p.a. What money is to be invested now? Take year as 365 days. 5. Your father will get a gratuity o f Rs. 3,50,000 after 10 years from now on his retirement. His employer has offered to pay him Rs. 70,000 per year for 10 years. If your fathers required rate of return is 1 % p.a. , should he accept the offer? 6. X ltd is creating a sinking fund to redeem its preference capital of Rs. 5,00,000 issued on 6/4/2004 and maturing on 5/4/2015. The first annual payment will be made on 6/04/2004. The company will make equal annual payments and expects that the fund will earn 12 % per year. How much will be the amount of sinking fund payment? 7. A firm is intending to create a sinking fund to retire Rs. 500 million , 9 % debentures after 10 years. How much amount should the firm deposit at the end of each year to accumulate Rs. 500 million after 10 years. Assume that the fund deposited each year earns interest of 10 % p.a. Valuation of bonds and debentures 8. A bond has a face value of Rs. 1000 and a coupon rate of 8 %. Find out its value if the required rate of return is 6 %, 7%, 8%, 9%, 10% in each of the following cases. a) The bond is perpetual b) The bond has a maturity period of 20 years. c) The bond has a maturity period of 5 years. 9. The coupon rate of a bond is 10%, which matures in 8 years, with a face value of Rs. 5000. This bond currently sells at 97%. Is this bond a desirable investment for an investor whose required rate of return is 11% Capital budgeting 10. M ltd is considering the purchase of a machine. There are two machines. A and B costing 50,000 Rs. While comparing the profitability of these machines, a discount of 10 % is to be used. Earnings after tax is expected to be as follows. Year 1 2 3 4 5 Machine A 15,000 20,000 25,000 15,000 10,000

Machine B

5000

15,000

20,000

30,000

20,000