Practice Questions

1. If you invest Rs.30,000/= in a bank account which gives you 10% simple annual interest,
determine the value of your investment after 6 years.

2. If you invest Rs.30,000/= in a bank account which gives you 12% annual compounding
interest, determine the value of your investment after 6 years.

3. If you deposit Rs.500,000/= in an account earning 5% per annum compounded annually,

how much would you have in the account after 3 years?

4. If you receive Rs.500,000/=, 2 years from now, what is the PV of that Rs.250,000/=, if
your interest rate is 5% per annum compounded annually?

5. Amali deposits Rs.100,000/= in an account earning 8% per annum compounded annually.

What is the future value of her deposit after 3 years?

6. Senuri needs Rs.100,000/= in 3 years. The interest rate is 8% per annum compounded
annually. How much should she deposit today to obtain Rs.300,000 in 3 years?

7. Find the future value at the end of one year if the present value is Rs.500,000/= and the
interest rate is 8% per annum. Use the following compounding frequencies:
I. Annual Compounding
II. Semiannual Compounding
III. Quarterly Compounding
IV. Monthly Compounding

8. Calculate the effective annual rates of the following nominal annual rates.
I. 25% annual interest rate compounding semi annually
II. 25% annual interest rate compounding quarterly
III. 25% annual interest rate compounding monthly

9. You are going to make the below-mentioned deposits in a bank account that pays 10%
per annum. How much will you have at the end of year 5?

Year Amount (Rs.)

1 10,000
2 50,000
3 30,000
4 10,000
5 10,000
 10. You are going to make the below-mentioned deposits in a bank account that pays 10%
per annum. What is the present value of your deposit?

Year Amount
(Rs.)
0 -
1 10,000
2 35,000
3 10,000
4 20,000
5 20,000

11. Mr. Kieth predicted annual cash profits from his business for immediate future as
follows:

Year Cash profit

(Rs.mn)
1 05
3 10
5 10
9 20

If the market interest rate for the next 9 years is stable at 10%, calculate the PV of these future
earnings.

12. Assume you deposit Rs.25,000 each at the end of every year for ten years in a savings
account that pays 8% per annum. How much will you have at the end of 20 years?

13. Assume you deposit Rs. 30,000 each at the end of every year for 10 years in a savings
account that pays 10% per annum. What is the present value of the deposits you are going
to make?

14. You purchased Prime PLC shares when stood at Rs.160/= per share 1 year ago. The stock
is currently trading at Rs. 100/= per share. Assume you have just received a Rs. 40/=
dividend.
i. What was the return earned over the past year?
ii. What is the rate of return of the investment?

15. Determine the risk of the below security using variance and standard deviation.

State of Economy Probability of Rate of return if

state of economy state occurs
1 0.2 10%
2 0.4 12%
3 0.4 15%

16. You have the opportunity to choose between the investment X and Y.

Condition Probability Forecasted return on asset (%)

Asset X Asset Y
1 0.2 5 25
2 0.2 10 20
3 0.2 15 15
4 0.2 20 10
5 0.2 25 5
i. Based on the expected returns what is the best investment?
ii. What is the variance and standard deviation of the two companies?
iii. What is the coefficient of variance of the two companies?
iv. If you are a rational investor, determine the investment you would choose.

17. An investor wishes to invest in a security – “K”, which has a beta of 1.4. Currently a risk-
free security would yield a return of 10%. If the expected market return is assessed at
12% what would be the return required by the investor for security K.

18. Calculate the payback period of each of the following projects.

Project 1 (Rs.) Project 2 (Rs.)

Project 3 (Rs.)
Investment 2,000,000 1,500,000 1,000,000
Year 1 500,000 100,000 100,000
Year 2 400,000 300,000 150,000
Year 3 200,000 500,000 200,000
Year 4 150,000 700,000 250,000
Year 5 100,000 800,000 350,000

19. ABC Company wants to invest 1,500,000 in an investment plan. They have got two
alternative investment plans and the net cashflows of those investment plans are as
follows:

Year Plan 1 (Rs.) Plan 2 (Rs.)

1 200,000 500,000
2 300,000 500,000
3 500,000 400,000
4 500,000 300,000
5 500,000 200,000
Total 2,000,000 1,900,000
Calculate the NPV of each plan if the cost of capital is 10%.

20. Piyal Company wants to get the contract of Rs. 2,500,000.00 in a government project.
But government has given two project details and the forecasted net cash flows of the
projects are as follows:

Year Project 1 (Rs.) Project 2 (Rs.)

1 800,000 (100,000)
2 700,000 500,000
3 600,000 700,000
4 500,000 1,000,000
5 400,000 1,100,000
Total 3,000,000 3,200,000

i. Compute the Pay Back Period of each plan

ii. Advice the company on investment decision based on NPV Approach (Cost of
capital is 12%)
iii. Calculate IRR (Take r2 as 20%)
iv. Advice the company