PRoBLEMSJ

ffialrtt,5yt:.tts}1p11gerlf.at1epositof(1,000nratiettli1ayift1reilrtert:strateis(a):
and (d) l5 pert:ent
percel\t, (b) 1t) pelceni, ttl rz Per(rerlt' trri'
, z ii you deposit ( 1009l::111?:,11ry:::li::::lj*::;l;'*;,,'i?)11;;TJ[::i]li":ilr iz-ao not use tables'
e
' 'J,il:,,ip}',1,?Tilr;ffi" il,,]it;;; .r.'i' itter
to give { 8,00ii
p',,r,i""r using the lurr: of
lz ycars in retllr]l for { 1'000 depositt-'d toclar
6.3 A finance corllparly offer.s approxirlate intet't-'st offcred
Using the trtle of li, figu'" t"'i-tlto o y,,u, for 10 years tl.rereafter'
what r'r'ili thes'
you save < 2,000 a year for-5 ynr.r, onii i,ooo
6.4 c.an is 10 percent?
t)i'15 years' if the rate of interest
savings cumulate it' ^ittt" e'1d abroad after l0 years' I-le exPt'cts the cost.:
son for riigh;. rr,.,Jiot
6.5 Mr. vinay pians." r""Ji..,.
thesestudiestobe{1,000,000.Flowmuchshould}resavearrnr'iallytohaveasunrof<i000'00i
rate is 12 Pt'r'cctrt? .-
at the end of tCf years"il'the inlert'st ^r z 10,000 enrl o{ 6 years to
1o 000 at the end
that it wili.poy u i,-.n.'p
6.6 A financ" .o*pur', advertises :.l]i:I.t in t^is offer?
i,000 Wilai interest raie is irnnlicit
investors *r.,o a"pvurll;i,.'..,Ji;i { 1'000 toclay' What interesi
p.omisJ, to give you { 5,000 ,f;;;10 y"u,, in "xc1ta"ge^fo'
6.7 Someone
discopri+(i) 10 perce^t
receivabre arter B years ir the rate or
, , Hl"J:p$::iiiJl,':J:?fro,ooo
(iii) L5 percent'
(ii) 12 pei'cent, and -.' ^.^*,.*., or
il;:;;"'annuitv { ?2'000
^r z oercent?
000 at 10 percent?
,, $';:i[",T:]:#;ffi;
o alternatives: (a) an annual
-r: ,h;i (b) ;l;;f * u*o":t of ( 50,000' If Mr']ingo expects
as he lives, a^d
r.,tr;ion of t 10,000 as long
', "r'e
1; .rte for 15 vears and the
i5 years interest t'*'"
interestraters:.h:"::.::',",**::;:1"il:ilT""JTIIf'"*
',;J;i;;;;;;;-;est.I-ILw much can he withdraw
l. :.*-i J"f*rtl { t,oo,ooo in a bank.which PaYs
1y#:*':?;d.;';1;;;;;i;"positedthe amount depos will
for a perioi oi:o yuu"' AssumetH ;; tLL t"a of 30 years
:;:.ua11y
,.'iirtle down to zero' , ._-.- -.,L.i^L -"nrridps t 1.000 at the end of year one,
d;;i"; each of the years 3 through 10' if the discount
;..aatisthepresentvalueofanincotneStreamwhichprovides<l,000attlreendofyea
;: j._i00 at rhe end y""ii*", ,J < s,ooo
"r
,*;:e is 12 Percent?
.i',i'atistlrepresentvalueofanincomestreamwhichprovides(2,000ayealforthefirstfive
percent?
,.,iars and { 3,000 y";;;;;;"'
itt"t"urtu'' if the discount rate is 10
' dividing the constant annual flow
perpetual
The present valrre for a
inr: "."ruy-tJJJ;;y ( 5'000 beginning
;ilf*'i,:X*:lT;
"}'ihat amourlt utuDr deposited'*rr i*,'11::.'::l:,1:::::1'i[:[:or
"-;;il;;;*
the end of 15 yeat
i r'rtu deposit earns 10 Percent Per year'
istur - :-- r:-^-^iat nnnrr:.t. If vou deposit
ffi :x:il*:ii:iff Ifirxir*H{:l#r:,*iff :*irf,ffi lj:;?:'r,ilIiiiT,};
rate wourcl vou earn on trris deposit?
::Xl?,:1""T#;,tffi',lHffii:l1l'i?i1'*no,,,n,u,"st
r^llmrrino cash rlow
r--^ ^r rr-^ ro,owins flow streams?
stfeams?
i':i}'f;;:IiJ'i,i;"";;" 'r 'nJ
q 7 B 9 10
J 4 6
Year 1 2
700 800 900 1000
300 400 500 600
A 100 200
300 200 100
1000 900 800 700 ,rg 500 400
B
500 500 500
500 500 500 500
500 500 500
C

which pavs 16 percent interest with

13133il'*,-n an investment company
:i. ffii;": #;xTj:,li H;; ;th w^ill ihis deposit grow to in 5 years?
qttarterly.o*p""lit';' 12 percent
s'y"ut' be' if lhe interest rate is
of { 5,000
-,: i-low much would a deposit ",'ii.'. "^i "f
of interest in the for-
rate of interest and stated rate
",, ll*;lrti:.ru:.xtr"ilx:li#:;;::l',;"
cases:'
'int/itStated
torviy'E and the frequency of compounding
is six times a
rate of interest is 12 per<:ent
I year'
CnseR:Statedrateofinterestis24percentandthefrequencyofcompoundingisfourtimesa
year. I

CaseC:Statedrateofinterestis24percerrtandthefreqrrencyofcompoundirrgistwelvetimesa
year' to'yic.:l<l an income of
is 12 perr:ent h.ow investment is requirecl now
: -lir lf the interest rate luch ,"ot una continui.g thereafter forever?
( 12,000 p*. y"r, r-rn the beginnir.,g or';;"'1.inz'o,otio 10 yearsl which would yor'r
choose?
yo. .r,oi."-u"t*een {-5,000 "r'"t
:. -i have a ^o*"lla"<
compounding is
rhe interest rate is 10 percent and
.., ull,"tii'J$J,yfl"l".:ffi1,1iffi:"w, If the inflation rate is 8 percent
will tr.Ie ae pos"it gr"* i" "1,:t 19 -I^","*'terms of the current rupee?
done semi-annually. whai
,rr1,r" trri a"iSri ufa*. 10 yeais in
per year, *t,ut *'it/u* th" "r
 sntnof i50,000attht:t'rriio1 l0yeals? Il.*'ttttt.^s,.trlir
irotrt 2-025t.202().
r, Z+ a 1r..ool1 r'oqLlirt's
< 20'(10() ar tht: beg'innitrg of t''rch )'t"rl .l
is 2 pt:rr'reut
at t'aclt ft'onr.20l'ii to 2-()2'(lillrt'itrttrrest rate
ire d.p.sit tr..',,
",,J,,i 1'car
(r.25 \\rrratisil.reprt:seni'r,.,ir,.ur<'z.,ooor,:cci,ralrr.rarr.rr;rllyi.rri0ycars'lJ''cfirstr.ceiptoc'r'rrsaltcr
or,{ .r,,,rt}r r<';r 15 vears i r'lru' uruci
., ru lli;';il]:il:"^ili'l:'liJi:;il]:'.!,.i;"j';"nsion
at i 2 percerrt i'nter.'st so
1,i?llf.
tl'rat t^t' ilorrowed atn.trnt can bt-' paid
rvith
can Mr.Rar.ur:sh borr.r,r, now till the first 1:e^si.^ amouni
t'e pensio. amou.t? The i.terest will be .rccr.rrrlirted
30 perce.t of

with a bank rran o{ { 60,000. A, inst.,nent of ( 3000 is pavable to

,." ff:ilT;'i.-;X;roli",",.cycre to*ura, tn...poy^""t of 1oa. with irrterest what interest rate
the bank ro,
"o.',lizJ -,j*r.,,
does tlre bank charge? e^d of 8, 9, anci
:r1,^.^ ^r r,,r.o,rirrroq each at tlie end
south India Corpoiation has to retire { 1000 million of debentures annually for
6.2g
fr"*
10 years ;;; *rJ ,r",urrd the firm deposrt in a sirrki.rg fund.account
need? The rret interesi rate earned
is 8 percent'
",1;. debenture
5 years, in orcier to IILeet tl'te
'"ii'"n"'""t of 1,000,000' He cieposits it in a bank which
(
6,29 Mr.LonSmarl frovi,lenr f",',;;;;;;;',t do so?
'";l;;;;
pays 10 percentinier"rt.if n" withdrais
an^,r.ffy { 200,000, how long can ire
is to be repaid
perce^i' The loan
< 500,000';;;;i"t;tt rate of 1+
6.30 phoenix Company borrows .r each of tte next
."i 4 years Prepare the loan
uii1,.
in 4 equal ur.,r.,rui"r,Jor*"r.,,u poyuur"
which charges
*: a fiat. you approach a housing con'tpanv
,.r, xH*XIil;:L"i;T 1,s00,000
l)l,y
puy < zod,ooo p". |""r"L*r.d loan
arno"rtisati'o.' what should be
13 percent r"*r"rr.'v"r'"u.
for
the right,g rylo^100,000 tons of iro^
ole Per vear
,.r, ff i1:T:?J,,:1":t?^1,11",i.,'" l'l,"r^ment
iron or" il^ffii"?. *.u" < 3,000 at the end of year 1 and increase
15 years. The price per_ton of value of the iron ore that you can
at the rate of 6 percent p* yuui'
iVnat is the present
thereafter
mine if the discorrnt rate is 16 percent?
6.33Asawinnerofacompetition,youcanchooseoneofthefollowingprizes:
a.{ 500,000 now
b.< 1,000,000 at the end of 6 Years
c' (
60,000 a Year forever
d.< 100,000 Per Year for 10 Years
hy 5 percent p.er year forever'
e. t 35,000
"".; i;;; ""a ,1J,i"g thereafter hai the highest prese.t value'
lf the interes, ,"{n iiii"r.""i,-*Hf.h
prize
i
q:".31,'" tz.tiot" of cash
y{;l';;ll incotne in the coming
6.34 r,ipe tnaia o*is-"" "ir'pipail. costs' The of oil shipped'
year. It has a very long life with
virtuliry n"giigiul. opera.ting -volutne per year' The
flo*, will d"ecrease by 3 percent
however, will decline over time ,^d,l;i',;;;?;ih
what is the presenl:d"":lll
;:ffi; il;it".;i'iJi;rever' zs y"ais, oiihut i, the pres.ent value
of its cash flows?
b.If the pipeline ffip"a
i, art",
it wl]-]ast for 15 vears more' but the pro-
well presently piodrr.es 50'000 b;;i;;;;;;..
6.35 An oil 3 percent Per year'
duction will fall by 5 percent-P^er
yel' O* il-t:"t 3t:'"*p*tl:l to increasethebywell's production if
the present value of
presently the prici oioil is $5:0 per barrel' fohat is
percent?
the discount rate is 10 for 20 years more, but the pro-
eo,ooo barreli.per year.It *ll],r*.
6.36 An oit welt pr"r"r,irffii".", Oii;Y+"
duction will fail by 6 percent Per year' :-O
well^s production if
mi;0 p". ar""t. Witut is the present value of the

- r, lh*:".HT:::iilffi1"fltlo,,,,u,ioss wil be enousf to meet vour retirem"nt "::d::-I:^:

annrral.sa-ving-s to increase by B
percent Per year
and you
saved ? 100rQ00 last year have at
i.ir,u"sted at 9 percent, how much would you
"*pu.a"yo"t
for the next 20 iears. If your.savingr.un

f;:li;i,:1: jliL::li on dero,slis made with it Ir the compounding

is done
r,
." "" til'; g n*u1t
interest rate?
on , weekly !35i4, what is the effective
MTNICASE
' "' -: -- -
- I i| help
L-.,,, |.oorr znr)roache(l
appr by a clierrt caller.i I{atnt::lit, who w.ll1ts s()me
:--i :ln investlnellt advi:lor, yoll have t'et:tr

",i],Lirl"i]tJr..]:i:ill;x'ltii,.,r,,r,r,r^rlh^s< 600,000intrrt:1':a,.'k ili:1.':la'stort'.,r'k{or15r'tt.r'e1'ears

of (r0. llanre.h', 1r..r.nt';;i;ty is
t 400'000 p"': yttt" I-le expet:ts his salary io
,:-,i1 rerire at rhe age
yt'-t'r urrtil his retirement'
r:..rease at the rate ni ti p""t'''t pcr in a portfolio in n'hich stocks and
t; i;;;;t i.,i, t utu,-r.. nna future savings
aSSume that these proptlrtiorrs wili be
has clecided rlur.Ir.
Ramesh
would equirlly !\.ei8hted. ro. tt.." '.ut." of simpliciiy,
be 7 percent and
:,lrrtls
::raintaineci by him tn.,i.rgl-,,,,'i,t.'il"
utro b.ii";;t tt'ut t'o"at ivo.ltl provicie a rcturn.[
yot' concur with his assessment'
,:ocks a return or ls p*"Jrrl wlthclraw-( 500'000 Per year from his invest-
he *"t'itr iike to
once I(amesh retires at the age of 60 t'ive t''pto tire age of 75 years' de also
wants to bequeath
:ie.ts for the following t5 yearsas tr" "rp".trio Ho* *"h would he need 15 years from now?
i 1,000,000 to his child'r;:;;;;"ititrirt' y"u.'ro. the next '.''tonuy 15 years to be able to meet his investment
How mrrch shouid i<"*"rr. save each will occrrr at the end of each year'
.:bjectives spelt out uUo""i a"'me that
thc
-savings the Iast three years of his life to a charitable
suppose Rarnesh *;;;; ;;;;^;"{
200,0fi;;;i-year in
of the year' How mur:h money would he need
at the ;;;ning
iatise. Each donation *"'rJ he made
,..i"^ r," reaches th. ";"";;;0 io *u't *'it'i:'Jni:;11u, *n.r" the speaker tatked about a person's
namesh is curio.s to rind out the prese^t
.,.,m::1ifi:1'IIJX::,X11;,i:TLlT':ili;;.u*r.su
rr*iii.itf ounrri." that his present salary of { 400'000
will be
...alue of his Iifetime ,ri;;;. F., it ,uke the preseut
" "r paid in annuaf instaliments what is
?'H,;;' ;#;;;"1";;;ilte
paid exactly one vear p"t^tt"tf Remember that Ramesh expects his salary
life time salary, if the discoun, ,oJ" ir'a
i,aiue of his
year. rrntil his retirement'
io increase at the rate of 12 percent per
ln answering th" ignor€ the tax factor'
,;;;;'il;"tio"l'

l' rtr'';lj'i
-? -- - I r^r rhp past decades and is the owner of a flourishing
nast two decad'
Sarclar Kartar Singh is'a resldent
of Thailand for the
business there. Hehas a son, satnam'
ro1li"1Trf^a*:*Xg+t,T,t,T"il[: H||;':T,[ilit*T:
p;"r"u' erso, Kartar's wire has made
:H1?:'1ili,,1*X.,X;':i;ill, ill"LH;;";;irthcrav r. and they intend to use their present
zutu';]inancial:+;"' oithe (mily
grand plans for ,r.."
some in New Delhi as per those plans'
for placing ,rit"bi" d;;;];^*iit itt"i'6ank
'isitAccordingtoth"p;;'',tT*^;;l'U1;!,q:'lti':#T:iiitl'.li;*'#:X11,|;:f;ffi:Tt:
Accordingto.theplan'satnamwour'"'-;:'i%;-inat the all'inciusive expenditure at Present rates
h ; ;;;;t"t"PrivatJ business school in Indi-
( beginn'-"8. of tl: f]1,:1,"".d second year resPectively' ]asleen
would be t 20 lakhs and 25 lakhs in the thit an amount of t 3 crores wourd then be needed'
wourd marry at the enfoi il;il
y"o.
""a"ro, be essential in India in the best interests of both the
Kartar,s wife is insistent that her presence would
children_to keep a -";;f#;;J;il;; during.his stint at the business school and most importantly,
to have ample time to il;fi;;iJ"",-"rt
wiih family and friends for ensuring a very good match
her and children's relocation to India at the end of ten
for the girl. Funds would have to be tied up for
yearsfromnow' .
' Kartar Singh alwaysrharr orprr"osnectfor
had great respect for his wife's commonsen{ seandlogic(thoughhewasalways
he has very recently sold one of his i^vestments' a
shy of acknowledgi"gitfl' foa,tu"[" the funds'
sum' For Satnam's MBA he has decided to open two
flat in a prime locatiay i.'nrigk;;'?;t a heftv
and llthyears respectively' For ]asleer/s marriage he
recurring deposit accounts, mituring ol lhe.1'0th after 10 years, he
wants to open a iurr" aep""rit ror 20 years. For farnily maintenance in India
"r*rrrii#
wants to open another;;;;"i;;i"; tlrm deposil
for t0 years with tl're maturity val*e of which he could
years. It is expected that after 10 years the
immediately p,rr.r,ruu lril;t; a-"u ro, ir.. fouowing 10
without taking inflation into consideration'
family in India would need { 12iakhs Per year
needed eti. he has called you, an upcoming finan-
To make tt e catcutaiii-r.,s .r., tr.,"_ip"iific amounts understand the
cial co.sultant. He ,t *uf.Jaf',. calculaiions in such a way tll-t he could easily
"tk;;;
logic thereof. yorr roa"*lJnJf;;-ht," that as
all the deposits would be made out of his NRE account
from the interest to be earned
with the bank, it woulJnot deduct any tax amount
Specifically yt" ur;;;;;;;;; ;;"late the amounts that need to be deposited now in:
(i) the two recurring deposit accounts' in the beginning of each month'
marriage'
(ii) a cumulatire fix8a a[p"tri for meetine the cost of Jasleen's
u#k for purchasing. the annuity due needed by the familv in
(iii) a curnurrti"u riiJli"=flJJ;;h.;; which is expected to give a return of 10 percent
India after 10 years frbrn an insura,ce conrpiuy
per year.
You set to work with the following data: . . t^- periods of more
deposit, nominal interest rate- for --
For both cumutative rili;;;;t"ar,d Rucrrrring
is donio"t: I a quarter' Inflation in India after 10 years
than 5 years is a p"r.li.i'uia
".I"pr"rtai^g years' The MBA course exPenses are likely to grow at 5
is expected to be 5 percent for the next ten
percent Per annum.
Show your detailed working.