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A training institute bought 50

computers at a total cost installed for


Rs. 25 lakh. The set up came into
operation on 1st April, 2012. The cost
of a similar new computer in due
course declined to Rs. 42,000. The
industry norm of the depreciation
charged on the computers is 30% on
written down value basis. At what
appropriate value he should insure

Solution:
Cost of acquisition of computers- 1st
April, 2012 2,500,000 Rs.
Depreciation cahrged 30%p.a.
Current replacement cost 2,100,000
Rs. 42000*50
Appropriate value to be insured
1,470,000 Rs. 2100000*(1-30%)

A With Profit life insurance policy with a track


record of offering bonuses at Rs. 50 per thousand
sum assured (SA) has a premium differential of
Rs. 30 per thousand SA from the similar pure
term policy. The corresponding pure term cover
of 20 years and SA Rs. 12 lakh is available at Rs.
7,860 p.a. Your client has recently paid 16th
premium in the With Profit policy. You evaluate
the differential returns from With Profit policy in
case of mortality today from the perspective of
8% p.a. return. You find that ___.

Solution:
Price differential in premium per thousand30 Rs.
Price differential in premium for a Rs. 12 lakh
policy 36,000 Rs. 30*1200000/1000
Estimated bonuses on maturity of with profit
policy 960,000 Rs. 50*16*1200000/1000
Rate expected on maturity proceeds 5.78% p.a.
RATE(16,-36000,0,960000,1)
Return differential from 8% p.a. -2.22% p.a.
5.78% - 8%

Mr. A has a gross annual salary of Rs. 10 lakh of which he


saves 25% including mandatory savings and voluntary
systematic investments. Another 35% goes towards
servicing of housing and car loans and taxes. His Financial
Planner advises him to accumulate 8 months household
expenses in liquid funds. He changes job and expects an
immediate rise of 30% in his gross income. The
incremental effect in his mandatory savings and taxes
would respectively be 1.5% and 3% of his revised gross
income. You estimate that other heads would not change
materially except his household expenses which would
rise by 8% due to child education. How many months will
it take to accumulate liquid reserves?

Solution:
Gross present salary 1,000,000 Rs. p.a.
EMI and Taxes 350,000 Rs. p.a. 1000000*35%
Statutory and long term investments 250,000 Rs. p.a. 1000000*25%
Household expenses 400,000 Rs. p.a. 1000000-350000-250000
Increased Gross Salary 1,300,000
Revised Household expenses432,000 400000*(1+8%)
Revised out go towards EMI and Taxes 389,000 350000+1300000*3%
Statutory and long term investments 269,500 250000+1300000*1.5%
Amount available for investments in liquid fund 209,500 1300000432000-389000-269500
Required liquid fund reserve 288,000 432000*8/12
Time required for building required reserve 1.3747 years
288000/209500
Months required 16.50 months 1.3747*12

A businessman bought a piece of land in March,


2002 for Rs. 80 lakh. He got a factory built on
the land at a cost of Rs. 90 lakh, the factory
became operational on 1st September, 2005.
The land prices have appreciated at 15% per
annum in the period and the construction cost
has escalated at 12% per annum since 2005. At
what value the factory should be insured in
April, 2013 on Market Value basis if the
depreciation on factory premises is charged at
6% per annum on straight line method?

Solution:
Cost of land in 20028,000,000 Rs.
Cost of construction in 2005 9,000,000 Rs.
Cost escalation 12%p.a.
Cost of construction in 2013 22,283,669
9000000*(1+12%)^8
Depreciation rate (on SLM method)- 8 years
6% p.a.
Therefore, sum insured on market value basis
11,587,508 Rs. 22283669*(1-8*6%)

An executive purchased an annuity for a lump


sum Rs. 85 lakh when he was of 53 years and
had in dependents a non-working spouse of
age 48 and a son of age 25. On reaching age
60, he expects at least one, himself or his
spouse, to survive till 85 years and contracts
an immediate life annuity with return of
purchase price at Rs. 10.15 lakh p.a. vested
against the purchase price of Rs. 1.61 crore.
What return is expected from the vesting
date?

Solution:
Age of the lawyer on vesting date 60 years
Age of spouse on vesting date 55 years
Maximum annuity period expected 30 years
Annual annuity amount 1,015,000 Rs.
Purchase price of annuity on vesting date
16,100,000 Rs.
Effective return expected from annuity 6.73%
p.a.RATE(30,1015000,16100000,16100000,1)

Mr. A has invested in an instrument


for three years. The instrument has
produced a return of 11%,15% and
12% in the three years. You as Mr. As
advisor have observed that the ruling
inflation in these three years
respectively was 4%,7% and 8%. You
find the real rate of return which Mr.
A has received as ______.

Solution:
If the amount invested is Rs. 100
Real value of the investment at year end: 1
106.7307692100*(1+11%)/(1+4%)
Real value of the investment at year end: 2
114.7106398106.73*(1+15%)/(1+7%)
Real value of the investment at year end: 3
118.959182 114.71*(1+12%)/(1+8%)
CAGR of real return 5.96%
(118.96/100)^(1/3)-1

Mr. A had taken a loan of Rs. 40 lakh in July 2010


at a floating rate of interest of 10% p.a for tenure
of 20 years from a housing finance company. The
company sent a notice raising the interest rate to
10.75% p.a. effective January 2012 thereby
increasing EMI. He decides to refinance the loan at
10.25% from a bank which charges a processing
fee of 1% of loan sanctioned. What absolute
amount he stands to save in the remaining tenure
if the outstanding loan amount as at end of March
2012 is refinanced so that the new loan terminates
as per original tenure?

Solution:
Tenure of loan 240 months
Loan amount 4,000,000 Rs.
Initial Rate of Interest 10.00% p.a.
EMI began in July 2010 38,601 Rs. PMT(10%/12,240,-4000000,0,0)
EMI installments repaid till December 2011 18
Loan outstanding as at December 2011 3,898,160 Rs. PV(10%/12,240-18,-38601,0,0)
Revised Rate of Interest beginning January 2012 10.75% p.a.
New EMI effective January 2012 40,516 Rs. PMT(10.75%/12,240-18,-3898160,0,0)
Loan outstanding to be repaid to Finance Co. in Mar 12 3,881,226 Rs. PV(10.75%/12,240-183,-40516,0,0)
Processing fee @ 1% of outstanding loan taken fr. Bank 38,812 Rs. 3881226*1%
Rate of Interest charged by bank beginning April 2012 10.25% p.a.
Outstanding tenure being new tenure for bank loan 219 months 240-18-3
EMI to be charged by Bank 39,245 Rs. PMT(10.25%/12,219,-3881226,0,0)
Amount to be incurred from Apr 2012 in earlier loan 8,872,908 Rs. 40516*219
Revised amount incurred towards EMIs 8,594,694 Rs. 39245*219
Processing fees included in revised amount incurred 8,633,507 Rs. 8594655+38812
Savings (absolute) in refinancing the loan 239,401 Rs. 8872908-8633507

A company has retirement age as 58 years.


An employee at age 35 expected increments
of 7% p.a. as per company policy when his
annual net earnings were Rs. 6 lakh. After 5
years, he got next cadre and his annual net
earnings became Rs. 9 lakh. The increments
in the revised cadre are at 9% p.a. He had
purchased a life cover by income replacement
method at age 35. What additional cover is
required if he expects his investments to yield
9.5% p.a.?

Solution:
Current net earnings 600,000 Rs.
Rate of increment of net earnings 7.0% p.a.
Current age 35 years
Retirement age 58 years
Rate of return from investing9.5% p.a.
Expected insurance by income replacement at age 35 10,830,035
Rs. PV((1+9.5%)/(1+7%)-1,58-35,-600000,0,1)
Age when promoted to new cadre 40 years
Revised net earnings at age 40900,000 Rs.
Revised Rate of increment of net earnings 9.0% p.a.
Revised insurance cover15,586,286 Rs. PV((1+9.5%)/(1+9%)1,58-40,-900000,0,1)
Additional cover needed 4,756,252 Rs. 15586286-10830035

A departmental store has rented a space in a Mall.


The Store took insurance of goods housed in the
shop for a value of Rs. 2.1 crore. The surveyor
assessed the average value of goods stored at the
facility at Rs. 2.5 crore. The Store in its quarterly
stock taking on 31st December 2012 assessed
value of the goods at landed cost of Rs. 1.8 crore.
On 17th January 2013 the Store had a major fire
destroying all goods stored therein. The Store as
per sales records had sold goods for Rs. 35 lakh in
the interim, making a profit of Rs.7.5 lakh. The
admissible amount of claim should be _______.

Solution:
Insurance taken for value of goods 21,000,000 Rs.
Assessed value of goods for which Insurer covered the risk
25,000,000 Rs.
Value of goods at landed cost on 31st December 2012 18,000,000
Rs.
Goods sold to customers till 17th January 2013 3,500,000 Rs.
Profit made on selling goods after 31st December 2012 750,000 Rs.
Landed cost of goods sold after 31st December 2012 2,750,000 Rs.
3500000-750000
Value of goods destroyed for which insurance was taken 15,250,000
Rs. 18000000-2750000
Admissible amount of insurance claim 12,810,000 Rs.
15250000*(21000000/25000000)

An entrepreneur setting up a leather processing unit


purchased a land in 2006 for Rs. 50 lakh and got
specialized construction done in 2007 for Rs. 1.6 crore.
In March, 2008 the processing plant was constructed at
a cost of Rs. 2 crore. The cost of such construction and
plant are escalating at 10% p.a. The corrosive nature of
chemicals requires depreciation on plant as well as
premises at 15% p.a. on written down value basis. As in
2013, what additional reserves should be created by
the company apart from depreciation reserves and the
residual insured value of plant and premises to
reinstate the facility in case it is destroyed in a
calamity?

Solution:
Cost of land 5,000,000 Rs.
Construction cost of premises 16,000,000 Rs.
Construction done in 2007
Cost of plant & machinery 20,000,000 Rs.
Plant installed in 2008
Depreciation rate on w-d-v method 15%p.a.
Escalation cost 10%p.a.
Year of reinstatement considered 2013
Current cost of reinstatement or premises 28,344,976 Rs. 16000000*(1+10%)^(2013-2007)
Current cost of reinstatement of plant 32,210,200 Rs. 20000000*(1+10%)^(2013-2008)
Total cost of reinstatement of the facility 60,555,176 Rs. 28344976+32210200
Depreciation reserves charged on premises in the B/S 9,965,608 Rs. 16000000(16000000*(1-15%)^(2013-2007))
Depreciation reserves charged on plant in the B/S 11,125,894 Rs. 20000000-(20000000*(115%)^(2013-2008))
Total reserves on premises and plant 21,091,502 Rs. 9965608+11125894
Residual Insured value of the plant 14,908,499 Rs. (16000000+20000000)-21091502
Therefore, additional reserves to be created 24,555,176 Rs. 60555176-21091502-14908498

APPRECIATED VALUE 36000000


=
16000000*(1+10%)^6+20000000*(
1+10%)^5
Total cost of reinstatement of the
facility= 60,555,176
(8344976+32210200 )

A familys monthly expenditure is Rs.


40,000. The earner accounts for 15%
of the expense. He wants to cover his
familys inflation-adjusted expenses
for the next 40 years considering
average inflation at 5.5% p.a. and
the investment return at 7.5% p.a.
The approximate life insurance
needed is ______.

Solution:
Current household expenses 40,000 Rs.
Self consumption 15.0% p.a.
Net Expenses 34,000 Rs. 40000*(1-15%)
Family expenses period 40 years
Rate of inflation 5.5% p.a.
Investment rate 7.5% p.a.
Monthly effective real rate of return 0.1566%p.m.
((1+7.5%)/(1+5.5%))^(1/12)-1
Family expenses to be covered 11,484,273 Rs.
PV(0.1566%,40*12,-34000,0,1)

A single mother, aged 33, earns Rs.


7.5 lakh p.a. out of which taxes and
self-expenses account for Rs. 1.5
lakh p.a. Her salary is expected to
rise 10% p.a. whereas taxes and
personal expenses are likely to rise
by 6% p.a. If she expects to work till
58 years, what economic value can
you enumerate on her life, if she is
confident of getting a return of 9%

Solution:
Current gross earnings 750,000 Rs.
Rate of increment of gross earnings 10%p.a.
Current taxes and expenses 150,000 Rs.
Rate of increment of taxes and espenses 6% p.a.
Rate of return from investing9% p.a.
Current age 33 years
Expected earnings potential upto 58 years
PV of gross earnings, discounted at growth rate 20,967,027
Rs. PV((1+9%)/(1+10%)-1,58-33,-750000,0,1)
PV of taxes/expenses, discounted at growth rate 2,737,432 Rs.
PV((1+9%)/(1+6%)-1,58-33,-150000,0,1)
PV of net earnings 18,229,596 Rs. 20967027-2737432

The earning member of a family


aged 35 years expects to earn till
next 25 years. He expects an annual
growth of 8% in her existing net
income of Rs. 5 lakh p.a. If he
considers an average investment
yield of 6% till his life expectancy of
80 years, what economic value could
be described to his life today?

Solution:
Current net income 500,000 Rs. p.a.
Rate of increase of net income 8% p.a.
Investment yield from investing 6% p.a.
Number of years the incme is expected to
continue 25 years
Economic value 15,785,662 Rs.
PV((1+6%)/(1+8%)-1,25,-500000,0,1)

Mr. X has a 25-year endowment policy, the annual


premium being Rs. 15,850 for a sum assured of Rs.
12 lakh. He has paid 18 premiums and has Rs.
6,50,000 towards declared bonuses on this policy. He
has met his objectives and has sufficient cover and
wealth support. He does not wish to continue in the
policy. He has the option to either make this policy
paid up, or surrender the same at a factor of 75% of
the paid up value. If he chooses to surrender, what
return he should earn on the surrender value to offset
the paid up value, when due?

Paid up value of the policy 1,514,000


Rs. 1200000*18/25+650000
Surrender value = 75% of the above paid
up value 1,135,500 Rs. 1514000*75%
Remaining term of the policy7 years
Rate to be earned on surrender value to
reach paid up 4.20% p.a.RATE(7,0,1135500,1514000,) CAGR

A 40 year old male individual can get a 15year with-profit life insurance policy of a
company at an annual premium of Rs. 10,046
which gives a sum assured of Rs. 1.5 lakh.
The company historically has declared
reversionary bonuses and terminal bonus per
thousand sum assured at Rs. 35 and Rs. 80,
respectively. A term plan with same life and
other parameters is generally available for
an annual premium of Rs. 3,565. Find the
return on investment component of the
companys policy on surviving the term.

Solution:
Premium of with-profit policy 12,046 Rs.
Premium of term policy 3,565 Rs.
Excess premium on investment
component 8,481 Rs.
Terminal value on surviving the term
240,750 Rs. Page 6
Return on investment component 7.63%
p.a. RATE(15,-8481,0,240750,1)

A warehouse insured its premises against


fire and natural calamity for a value of Rs.
1.25 crore. Towards liability coverage,
separate insurances for risks of fire and
burglary for Rs. 12 crore each were taken to
cover the goods kept at any time. The
company took an umbrella insurance of Rs.
15 crore also. The warehouse was
completely destroyed in fire. The registered
value of goods at that time was Rs. 30 crore.
What insurance can be settled in the
Companys claim?

Nil to the Warehouse and Rs. 28.25 crore towards liability


proportionately to clients
(b) Rs. 1.25 crore to the Warehouse and Rs. 19.8 crore
towards liability proportionately to clients
(c) Rs. 1.25 crore to the Warehouse, Rs. 12 crore
(max.) towards liability for perishable goods of clients,
and Rs. 15 crore (max.) towards liability
proportionately to others
(d) Rs. 1.25 crore to the Warehouse and Rs. 27 crore
towards liability proportionately to clients
(e) Not Attempted
Correct Answer : Rs. 1.25 crore to the Warehouse and
Rs. 27 crore towards liability proportionately to clients

2) A client's 20 year money back policy of sum


assured rs 2 lakh has annual premium of rs
13672, Policy pays back 20% of s.a after each of
first three 5-years survival periods and another
40% of s.a on surviving full term. The client has
received the third money back. You estimate the
gross returns presently in the policy considering
reversionary bonus of rs 50 per thousands s.a.
you compare the cost benifit if the client pays all
premiums and survives the policy and also gets rs
150 per thousand s.a as loyalty bonus. you
conclude that _________.

a)the overall return improves marginally by


1.15% p.a
b)the additional in flow on 5 future premiums
would amount to over 19% p.a returns
c) the additional in flow on 5 future premiums
would amount to nearly 30% p.a returns
d) the additional in flow on 5 future premiums
less opportunity cost would amount to nearly
12% p.a

The earning member of a family


aged 35 years expects to earn till
next 25 years. He expects an annual
growth of 8% in her existing net
income of Rs. 5 lakh p.a. If he
considers an average investment
yield of 6% till his life expectancy of
80 years, what economic value could
be ascribed to his life today?

Solution:
Current net income 500,000 Rs. p.a.
Rate of increase of net income 8% p.a.
Investment yield from investing 6% p.a.
Number of years the incme is expected to
continue 25 years
Economic value 15,785,662 Rs.
PV((1+6%)/(1+8%)-1,25,-500000,0,1)

A retiree of age 60 wants to enter into the


reverse mortgage scheme by mortgaging his
self-occupied house which is valued at Rs. 80
lakh. An approved lending institution agrees
to provide periodic monthly payments under
the scheme considering a loan to value ratio
of 80% and at a rate of interest of 13.75% p.a.
If the retiree opts for a 15-year term of
reverse mortage, what fixed periodic monthly
payments he stands to receive under the
scheme?

Solution:
Value of House 8,000,000 Rs.
Loan Eligible 6,400,000 Rs. 8000000*80%
Rate of Interest 13.75% p.a.
Term 15 years
180 months
Monthly payments under reverse
mortgage 10,703 Rs.
PMT(13.75%/12,180,0,-6400000,1)

A retiree of age 65 has fixed pension of Rs. 15,000 per


month. His household expenses have exceeded his pension
of late and are Rs. 16,000 per month now. He has
approached an approved lending institution under Reverse
Mortgage Scheme. He is offered fixed monthly payments
for 15 years at a rate of interest of 13.75% on Rs. 64 lakh
eligible value of his home. He meets his annual expenses
as increased by 6% inflation every year and invests the
excess amount from his two fixed annuities, fixed pension
and reverse mortgage stream, in an investment yielding
10% p.a. at the end of every year starting from this year
onwards. You assess at the end of five years thus
accumulated fund against the total liability under Reverse
Mortgage and find that ______.

Alternative Method fo finding accumulated fund:


PV: Fixed annuities (Pension+RM stream) for 5-year
period 1,286,147 Rs. [1]PV(10%,5,(10703+15000)*12,0,1)
PV: Expenses rising @ 6% p.a. for 5-year period 892,675
Rs. [2]PV((1+10%)/(1+6%)-1,5,-16000*12,0,1)
PV of excess funds to be invested for 4 annual periods
393,472 Rs. [1-2] (Investment of excess funds began at
the end of year 1, thus 1st accumulation end of year 2,
----)
Accumulation at the end of year 5 576,083 Rs.
393472*(1+10%)^4

An annuity product is designed in


such a way that it gives first cash
flow at 6% of the corpus at the end
of first year and thereafter every
year in the form of growing annuity
at the rate of 5%. If the cash flows
are guaranteed for 15 years, what
rate of return is obtained on the
corpus invested?

Solution:
Suppose the corpus invested is: 100 Rs.
Cash flow at the end of first year 6 Rs.
Growth in annuity in every subsequent year 5.00% p.a.
Guaranteed period of annuity 15 years
(-) Corpus invested (100)
+ Cash flow Year 1 6
+ Cash flow Year 2 6.30
+ Cash flow Year 3 6.62
+ Cash flow Year 4 6.95
+ Cash flow Year 5 7.29
+ Cash flow Year 6 7.66
+ Cash flow Year 7 8.04
+ Cash flow Year 8 8.44
+ Cash flow Year 9 8.86
+ Cash flow Year 109.31
+ Cash flow Year 119.77
+ Cash flow Year 1210.26
+ Cash flow Year 1310.78
+ Cash flow Year 1411.31
+ Cash flow Year 1511.88
IRR 3.04%

A retired person has contracted a 20-year immediate


annuity plan which provides an annual stream of
income, increasing year-on-year at 5%. He is due to
receive 5th installment of Rs. 5.50 lakh which is 6% of
the balance corpus remaining in annuity. He wants
the term of the annuity to increase. He estimates that
Rs. 4.75 lakh would be sufficient for his current living
expenses. He proposes this to the annuity provider
with other terms remaining as originally agreed. If the
yield of the annuity is 6.5% p.a., how many more
installments would get added in the restructured
annuity than the original?

5th cash flow stream to be received 550,000 Rs.


% of balance amount 6%
The outstanding balance of corpus before 5th installment
9,166,667 Rs. 550000/6%
Revised withdrawal amount of 8th installment 475,000 Rs.
Interest rate 6.50% p.a.
Growth in annuity as agreed 5% p.a.
Outstanding corpus after paying 5th installment (out of 20)
8,691,667 Rs. 9166667-475000
Number of years the corpus to last beginning 6th install. 21.36
Rs. NPER(1.065/1.05-1,475000*1.05,-8691667*1.065,0,1)
Total installments including already 8 disbursed 26.36 5+21.36
Increase in installments 6.36 installments 26.36-20
Page

A retired couple has fixed pension of Rs. 30,000 p.m.


while their current living expenses are at 31,000 p.m.
They stay in their own house. You advise them to avail
a loan under reverse mortgage which is an eligible
lump sum of Rs. 40 lakh for 15 years at 12.5% p.a.
interest. The annual interest is calculated after every
12 months on the pre-standing balance and added to
the outstanding loan amount. You invest the available
amount after withholding the excess normal expenses
for the first year and considering 6% inflation thereafter
at the beginning of every year. If the investment yield
is 9% p.a., by what amount outstanding loan would
exceed investment after 8 years?

Loan outstanding at the end of 8


years 10,263,138 Rs.
4000000*(1+12.5%)^8

Current annual expenses 372,000 31000*12


PV of 6% escalataing expenses discounted at 9% for 8
years (2,704,570) PV(1.09/1.06-1,8,372000,0,1)
PV of fixed pension discounted at 9% for 8 years
(2,171,863) PV(9%,8,30000*12,0,1)
PV of additional expenses recovered from RM loan
disbursed 532,707 2704570-2171863
Balance loan amount to be invested for 8 years at 9% p.a.
3,467,293 4000000-532707
Accumulated value after 8 years 6,908,798
3467293*(1+9%)^8
Shortfall in value accumulated from loan liability
(3,354,340) 6908798-10263138