Time Value of Money - Numerical Part

Importance:
1. From Time Value of Money One Numerical of 1 mark was asked In 2016 RB Grade B Exam
2. This topic is very important to learn basics of Finance. You cannot attempt the Numerical
on Bonds section unless you have grip over this section.

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 Contents
1 Introduction....................................................................................................................... 4
2 Numerical on Simple Interest ............................................................................................... 4
3 Numerical on Compound Interest with Annual Compounding ................................................... 5
4 Numerical on Compound Interest with Other than Annual Compounding ................................... 6
5 Numerical on Finding Rate of Interest .................................................................................... 9
6 Numerical on Finding Future Value of Money ........................................................................10
7 Numerical on Effective Rate of Interest .................................................................................11
8 Present Value of Money......................................................................................................13
8.1 Numerical on Present Value of Money Single Cash Flow ...................................................13
8.2 Numerical on Present Value of Money Multiple Cash Flow ................................................14
8.3 Numerical on Present Value of Money – Calculate Rate of Interest.....................................15
8.4 Numerical on Present Value of Money – Annuities ...........................................................17
9 Numerical on Future Value of Money – Annuities ...................................................................18
10 Conclusion.....................................................................................................................19

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 1 Introduction
In Part 1 we learned about the following and did some numerical on these topics
1. Simple Interest
2. Compound Interest and Future Value of Money
3. Effective Interest Rate

We also touched upon the Discounting or Present Value concept but we did not do it in detail

In this document we will again do some Numerical on the above topics. Then will learn about
below topic in detail
1. How to Find Present Value of Money

2 Numerical on Simple Interest

Numerical 1:
Mr. Rahul has deposited 1, 00,000 in a saving bank account at 5 per cent simple interest and wishes
to keep the same, for a period of 5 years. Calculate the accumulated Interest

Solution:
Simple Interest (S1) = P0 (I) (n)
Where S1 = Simple interest
P0 = Initial amount invested
I = Interest rate
n = Number of years

S 1 = 1, 00, 000 × 0.05 × 5 years

S 1 = 25,000

Numerical 2
Mr. Vermsa’s annual savings is 1,000 which is invested in a bank saving fund account that pays a 6 per
cent simple interest. Verma wants to know his total future value at the end of a 8 years’ time period.

Solution: Here we have to calculate the total value at the end of 8 years
So value at the end of 8 years would be (Future Value) = Principal at Start + Total Interest for 8 years
Future Value = 1000+1000*.06*8
= 1000+480
= 1480
S0 Mr. Verma would get 1480 at the end of 8 years

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 3 Numerical on Compound Interest with Annual Compounding
We did some Numerical on Simple Interest in previous section. In this section we will first do the
same Numerical with Compound Interest. The compounding in below examples is annual i.e.
interest after first year would become part of principal and you would get interest in 2 nd year on
the interest generated in first year

Numerical 3:
Mr. Rahul has deposited 1, 00,000 in a saving bank account at 5 per cent Compound interest on
annual basis and wishes to keep the same, for a period of 5 years. Calculate the accumulated Interest

Solution:
n
The total amount (Principal + Interest) at the end would be = P (1 + r)
Compound Interest would be Total Amount - Principal
So, Compound Interest = P (1 + r) n - P
Where P is Principal
r is annual rate of Interest
n is number of years

Compound Interest = 1, 00,000 * (1+.05) 5 – 1, 00,000

= 127628.15 – 1, 00,000
= 27628.15

So you can observe here that simple interest in Numerical1 was 25,000 whereas Compound Interest is
coming out to be 27628.15. Hence with Compounding value of money increase and more the time,
more the money would increase. This is called power of compounding

Numerical 4
Mr. Vermsa’s annual saving is 1,000 which is invested in a bank saving fund account that pays a 6 per cent
Compound interest on annual basis for 8 years. What would be Interest earned?

Solution:
The total amount (Principal + Interest) at the end would be = P (1 + r) n
Compound Interest would be Total Amount - Principal
So, Compound Interest = P (1 + r) n - P
Where P is Principal
r is annual rate of Interest
n is number of years
Compound Interest = 1000 * (1+.06) 8 – 1000
= 1593.848 – 1000
= 593.848

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 4 Numerical on Compound Interest with Other than Annual
Compounding
The Numerical on compounding which we did in the previous section were based on annual
compounding which means that in 2nd year interest would be charged on the interest accumulated
in the first year

Now compounding can be semi-annual or quarterly or even monthly basis. Semiannual compounding
would mean interest would be charged on interest accumulated every 6 months. In the same way
monthly compounding would mean that interest would be charged on interest accumulated every
month

The same numerical which we did in previous section with annual compounding would be done
with semi-annual or quarterly compounding in this section

Numerical 5:
Mr. Rahul has deposited 1, 00,000 in a saving bank account at 5 per cent Compound interest on semi-
annual basis and wishes to keep the same, for a period of 5 years. Calculate the accumulated Interest

Solution:
The total amount (Principal + Interest) at the end would be = P (1 + r/m) m*n
Where P is Principal
r is annual rate of Interest per annum
n is number of years
m = Number of times compounding is done during a year

Compound Interest would be Total Amount - Principal

So, Compound Interest = P (1 + r/m) m*n - P

Here since compounding is done semi-annually it means compounding is done two times a year and
hence m = 2

Compound Interest = 1, 00,000 * (1+.05/2) 2 *5 – 1, 00,000

= 1, 00,000 * (1+.05/2) 10 – 1, 00,000
= 128008.4544– 1, 00,000
= 28008.45

In Numerical 3 the interest with annual compounding was 27628.15 and in this numerical the interest
with semi-annual compounding is 28008.45. So more the frequency of compounding, more the
interest on the principal

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 Numerical 6
Mr. Vermsa’s annual saving is 1,000 which is invested in a bank saving fund account that pays a 6 per cent
Compound interest on quarterly basis for 8 years. What would be Interest earned?

Solution:
The total amount (Principal + Interest) at the end would be = P (1 + r/m) m*n
Where P is Principal
r is annual rate of Interest per annum
n is number of years
m = Number of times compounding is done during a year

Compound Interest would be Total Amount - Principal

So, Compound Interest = P (1 + r/m) m*n - P
Here since compounding is done quarterly it means compounding is done 4 times a year and hence
m=4

Compound Interest = 1000 * (1+.06/4) 4 *8 – 1000

= 1000 * (1+.06/4) 32 – 1000
= 1610.32432 – 1000
= 610.32

Numerical 7

Mr. Subu annual saving is 1,000 which is invested in a bank saving fund account that pays an 8 per cent
Compound interest on quarterly basis for 8 years. What would be the total future value or the terminal
value at the end of 8 years’ time period?

Solution:
The total amount (Principal + Interest) at the end would be = P (1 + r/m) m*n
Where P is Principal
r is annual rate of Interest per annum
n is number of years
m = Number of times compounding is done during a year

Here since compounding is done quarterly it means compounding is done 4 times a year and hence
m=4

Here we have to find total value and not only compound interest at the end of 8 years

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 Total Value = P (1 + r/m) m*n
= 1000 * (1+.08/4) 4 *8
= 1884.54

Numerical 8
Mr. Ravi Prasad and Sons invests 500, 1,000 1,500, Rs 2,000 and 2,500 at the end of each year. Calculate
the compound value at the end of the 5th year, compounded annually, when the interest charged is 6% per
annum.

Solution:

This is a tricky question. Here the different value is being invested each year. So we have to divide it in
parts. For each value will calculate the value at end of 5 years

First Value:
Rs. 500 is invested at end of 1st year. Since total 5 years are there so total duration is 4 years. Please note
duration is not 5 because Rs. 500 is invested at the end and not the start of 1 st year.

At end of 5 years first value will become = P (1 + r) n

= 500 * (1+.06) 4
= 500* 1.262

= 631.23

Second Value:
Rs. 1000 is invested and duration (n) would be 3 years
At end of 5 years first value will become = P (1 + r) n
= 1000* (1.06) 3
=1191.016

Third Value:
Rs. 1500 is invested and duration (n) would be 2 years
At end of 5 years first value will become = P (1 + r) n
= 1500 * (1.06) 2
= 1685. 4

Fourth Value:
Rs. 2000 is invested and duration (n) would be 1 years
n
At end of 5 years first value will become = P (1 + r)
= 2000* (1.06)
= 2120

Fifth Value:

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 Rs. 2500 and duration (n) would be 0 years since it is invested at end of 5 years
n
At end of 5 years first value will become = P (1 + r)
= 2500* (1.06)0
= 2500

So total sum at end of 5 years would be = 631.23+1191.016+1685.4+2120+ 250

= 8127.64

5 Numerical on Finding Rate of Interest

Numerical 9
Mr. Rahul has deposited 1, 00,000 in a saving bank account at certain simple interest and wishes to
keep the same, for a period of 6 years. Calculate the rate of Interest if Rahul gets 30,000 as Interest
at the end of 6 years

Solution:
Simple Interest = 30,000
Since Simple Interest = P0 (I) (n)
Where
P0 = Initial amount invested
I = Interest rate
n = Number of years

So P0 (I) (n) = 30,000

1, 00,000*I*6 = 30000
I = 30000/ (600000)
I = 1/20
I = .05 or 5%

Numerical 10
Mr. Rahul has deposited 1, 00,000 in a saving bank account at certain per cent Compound interest
on annual basis and wishes to keep the same, for a period of 6 years. Calculate the rate of Interest if
the accumulated interest is 34009.6

Compound Interest = P (1 + r) n – P
34009.6 = 1, 00,000 (1+r)6 - 1,00000
134009.6 = 1, 00,000 (1+r)6
1.34 = (1+r) 6
r=5%

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 Numerical 11
Mr. Vermsa’s annual saving is 1,000 which is invested in a bank saving fund account that pays a certain
per cent Compound interest on quarterly basis for 8 years. What is the rate of interest if the interest earned
is 1203.75?

Solution:
Compound Interest = P (1 + r/m) m*n - P
1203.75 = 1000* (1+r/4)4*8 - 1000
1203.75 = 1000 * (1+r/4) 32 – 1000
2203.75 = 1000 * (1+r/4) 32
2.203 = (1+r/4) 32
r = .1 or 10 %

6 Numerical on Finding Future Value of Money

The numerical on Compounding are same as Future Value of Money. Same Formula is used. We will
still do 2-3 Numerical in this section for your comfort

Numerical 12
Suppose at the time of your birth, 25 years ago, your father deposited 1,200 in an account at an
annual interest rate of 15 percent. How much money would exist in that account today assuming
annual compounding?

Solution:
Future Value of Money = P (1 + r) n
= 1,200(l + .15)25
= 39,502.74

Numerical 13
Suppose at the time of your birth, 35 years ago, your father deposited 1,200 in an account that earns
an annual interest rate of 15 percent with the following stipulations:
(a) You must withdraw half the accumulated amount on your eighteenth birthday
(b) On or after your thirty-fifth birthday, you can close the account.

Today is your thirty-fifth birthday. How much money is left in the account to withdraw?

Solution:
The amount of money in the account on the eighteenth birthday is:
FV = 1,200(1 + .15)18 = 14,850.54.

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 Amount withdrawn = 14,850.54 ÷ 2 = 7,425.27
Remaining Balance after withdrawal at end of 18 years = 7,425.27

Duration left = 35-18 = 17 years

The future value of the remaining balance of $7,425.27, which by the thirty-fifth birthday will have
accrued interest for 17 years, is
FV= 7,425.27(l + .15)17 = 79,905.29.

Numerical 14
Suppose Mr. Jai Singh Yadav deposited 10, 00,000 in a financial institute which pays him 8 percent
compound interest quarterly for a period of 5 years. Show how the deposit would grow

Solution:

Future Value = P (1 + r/m) m*n

= 1, 00,000 (1+.08/4) 4*5

= 1, 00,000 (1+.02) 20
= 1, 00,000 * 1.485947
= 148594.73

7 Numerical on Effective Rate of Interest

Numerical 15
A company offers 14% rate of interest on deposits. What is the effective rate of interest if the compounding
is done on semiannual basis?

Solution:

The formula for calculation of effective interest is as below:

EIR = (1+r/m) m -1

where EIR = Effective Rate of Interest

r = Nominal Rate of Interest (Yearly Interest Rate)
m = Frequency of compounding per year

EIR = (1+.14/2) 2 -1
= (1+.07)2 -1
= 1.1449 -1
= .1449 0r 14.49 %
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 Numerical 16
Following are the rates and there frequency of Compounding given. Select the one which will provide
maximum effective rate of Interest

Rate of Interest Compounding

Yearly 14%
Half-yearly 13.75%
Quarterly 13.60%
Monthly 13.40%

Solution:

To find the best option among the following we need to find the effective rate if interest for all these
options

The formula for calculation of effective interest is as below:

EIR = (1+r/m) m -1

where EIR = Effective Rate of Interest

r = Nominal Rate of Interest (Yearly Interest Rate)
m = Frequency of compounding per year

Rate of Interest Compounding Formula: Result

EIR = (1+r/m) m -1

Yearly 14% = (1+.14/1)1 – 1 =14%

Half Yearly 13.75% = (1+.1375/2)2 -1 = 14.22%

Quarterly 13.60% = (1+.1360/4) 4 - 1 =14.30%

Monthly 13.40% = (1+.1340/12) 12 -1 =14.25%

So from above result we can conclude that Quarterly compounding option of 13.60 rate of interest
is the best option. It gives effective rate of interest of 14.30% which is maximum among the option

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 8 Present Value of Money
Accountants use Present Value (PV) calculations to account for the time value of money in a number of
different applications.

For example, assume your company provides a service in December 2016 and agrees to be paid $100 in
December 2017. The time value of money tells us that the part of the $100 is interest you will earn for
waiting one year for the $100. Perhaps only $91 of the $100 is service revenue earned in 2016 and $9 is
interest that will be earned in 2017. The calculation of present value will remove the interest, so that the
amount of the service revenue can be determined.

Another example might involve the purchase of land: the owners will either sell it to you for
$160,000 today or for $200,000 if you pay at the end of two years. To help analyze the alternatives, you
would use a PV calculation to tell you the interest rate implicit in the second option

The formula for Present Value of Money is the same as used in Future Value Calculations earlier in this
document

Future Value = P (1 + r/m) m*n

P = Future Value / (1 + r/m) m*n

Where
P is Present Value
FV is Future Value
r is the interest rate per annum
n is the number of years
m is compounding frequency

8.1 Numerical on Present Value of Money Single Cash Flow

Numerical 17
You are valuing a project that is expected to run for 5 years and is expected to get one-time cash flow of
$500m after five years. You estimate a discount rate of 11%. What is the present value of this cash flow?

Solution:

P = Future Value / (1 + r/m) m*n

m - Here no compounding frequency is given, so we will assume m to be 1
r = 11%
n = 5 years
P = 500 / (1+ .11/1)1*5
P = 500 / (1.11)5
P = 296.73

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 Numerical 18
You are valuing a project that is expected run for 5 years and is expected to get one-time cash flow of
$500m after five years. You estimate a discount rate of 11% compounding half yearly. What is the
present value of this cash flow?

Solution:

This numerical is same as Numerical 17, only difference being the compounding frequency

P = Future Value / (1 + r/m) m*n

m – 2 (half yearly compounding)
r = 11%
n = 5 years
P = 500 / (1+ .11/2)2*5
P = 500 / (1.055)10
P = 292.74

8.2 Numerical on Present Value of Money Multiple Cash Flow

Numerical 19
You are valuing a project that is expected run for 3 years and is expected to get cash flow of $500m at
the end of each year. You estimate a discount rate of 11%. What is the present value of this cash flow?

In this there is not a single cash flow but multiple cash flows which are same. So person would get 500 at
the end of each year.

So Present value of cash flow got at the end of first year would be
P = Future Value / (1 + r/m) m*n
m - Here no compounding frequency is given, so we will assume m to be 1
r = 11%
n = 1 year

P = 500 / (1+ .11/1)1*1

P = 450.45

Similarly Present value of cash flow got at the end of second year would be
P = 500/ (1+.11/1) 1*2
P = 500/ (1.11)2

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 P = 405.81

Similarly Present value of cash flow got at the end of third year would be

P = 500/ (1+.11/1) 1*3

P = 500/ (1.11)3
P = 365. 59

So Present Value of all the cash flows would be =450.45 + 405.81 + 365.59
= 1221.85

8.3 Numerical on Present Value of Money – Calculate Rate of Interest

Numerical 20
You are valuing a project that is expected run for 5 years and is expected to get one-time cash flow of
$500m after five years. The present value of the cash flow is 296.73. What is the Interest Rate used for
calculating the Present Value

Solution:

P = Future Value / (1 + r/m) m*n

m = Here no compounding frequency is given, so we will assume m to be 1
P = 296.73
N = 1 year
r =?

296.73= 500 / (1+r) 1*5

296.73= 500 / (1+r) 5
(1+r) 5 = 500/296.73
(1+r) 5 = 1.685
r = 11%

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 Numerical 21
You are valuing a project that is expected run for 5 years and is expected to get one-time cash flow of
$500m after five years. The present value of the cash flow is 292.74. What is the Interest Rate used for
calculating the Present Value assuming the frequency of compounding to be half yearly?

Solution:

P = Future Value / (1 + r/m) m*n

m = 2 (half yearly compounding)
P = 292.74
N = 1 year
r =?

292.74 = 500 / (1+r/2) 2*5

292.74 = 500 / (1+r/2) 10
(1+r/2) 10 = 500/292.74
(1+r/2) 10 = 1.708
r = 11%

Numerical 22
A Company will get three cash flows for 500 each at the end of next three years. If the present value is
supposed to be 1221.85 then what is the rate of interest used for discounting

Solution:

In this there is not a single cash flow but multiple cash flows which are same. So person would get 500 at
the end of each year for 3 years

So Present value of cash flow got at the end of first year would be
P = Future Value / (1 + r/m) m*n
m = Here no compounding frequency is given, so we will assume m to be 1
r = 11%
n = 1 year

P = 500 / (1+r/1) 1*1

Similarly Present value of cash flow got at the end of second year (n=2) would be
P = 500/ (1+r/1) 1*2

Similarly Present value of cash flow got at the end of third year (n=3) would be
P = 500/ (1+r/1) 1*3

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 So Present Value of all the cash flows would be
P = 500 / (1+r/1) 1*1 + 500/ (1+r/1) 1*2 + 500/ (1+r/1) 1*3
P = 500 / (1+r/1) 1 + 500/ (1+r/1) 2 + 500/ (1+r/1) 3
1221.85 = 500 * (1/ (1+r) + 1/ (1+r) 2 + 1/ (1+r) 3 )
1/ (1+r) + 1/ (1+r) 2 + 1/ (1+r) 3 = 1221.85/500
1/ (1+r) + 1/ (1+r) 2 + 1/ (1+r) 3 = 2.44
r = 11%

8.4 Numerical on Present Value of Money – Annuities

Consider the below example

What is the present value of the project which pays cash flows of 1000 at the end of each year for next 5
years assuming interest rate to be 5%?

Here point to note is that cash flow is given for next 5 years. So if you start calculating present value for
each year then you have to calculate present value for 5 cash flows. This is a very tedious process. But
good point is that we have formula for the same

C = Cash flow per period

i = interest rate
n = number of payments
PV is present value. We can also call it P
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 Such cash flows which have same amount of cash flow each year are called annuities. The formula above
is also valid only in case of cash flow being same. If the cash flow in any of the years differ from other
cash flows then we cannot apply this formula

Numerical 23:
What is the present value if the project which pays cash flows of 1000 per year for each of the next 5
years assuming interest rate to be 5%?

Solution:

Here since number of Cash flows are large we will use the Annuity formula

n=5
i = 5% or .05
C=1000

P = 1000 * [(1 - (1+.05) -5 ] / .05

P = 4329.47

9 Numerical on Future Value of Money – Annuities

We started this chapter with Future Value of Money and we will close also with Future Value of Money.
In the previous section we discussed the Present Value of Annuities. But what about the future value of
Annuities?

Consider the below example

Suppose you invest 1000 at the end of each year for next 5 years with interest rate to be 5%. What
would be total value of money at the end of 5 years?

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 Here point to note is that investment is done for next 5 years. So if you start calculating future value for
investment done in each year then you have to calculate future value for 5 cash flows. This is a very
tedious process. But good point is that we have formula for the same

C = Cash flow per period

i = interest rate
n = number of payments

Numerical 24
Suppose you invest 1000 at the end of each year for next 5 years with interest rate to be 5%. What
would be total value of money at the end of 5 years?

Solution:

Here since number of Cash flows is large we will use the Annuity formula

n=5
i = 5% or .05
C =1000

FV = 1000 [(1+.05) 5 – 1] / .05

FV = 1000 [1.27628 - 1] / .05

FV = 1000 [.27628] / .05

FV = 276.28/.05
FV = 5525.6

10 Conclusion
We have covered large range of numerical from this topic. This topic is still very large and we can have
100 pages worth of content on this. But in RBI exam they do not ask complex numerical and the content
covered here will make sure that you are able score well in numerical on Time Value of Money

Just keep in mind the different type of Numerical we have done

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