Manmeet kaur

DISCOUNTING

Time period of Magnitude of

Payment type Discounting type
payments cashflows

Single time Multiple times Start of year Annually

Similar amount End of year Semi annually

Varying amount Quarterly

Continuously
• Future value
The value of an amount that is deposited/invested today, on a
future date.

• Compounding
It is a technique of finding the future value by applying the
concept of compound interest.

• Present value
It is the current value of a future sum of money, discounted at a
specified rate of return.

• Discounting
It is a technique of determining present value of a future amount.
A = P (1 + i)n
A = 1000 (1 + 0.10)4
A = 1000 (1.464)
A = 1464

1464 = P (1 + 0.10)4
1464 x 0.683 = P
999.912 = P
• On his way to home, an office goer ‘Neymar Jr’
met a lunatic person who promised to pay him
INR 2000, at the end of 2 years for an
‘undisclosed sum’ to be paid right now.
• Neymar disposed of the guy and came straight
back home. Just before going to bed, the guy’s
offer once again flashed in front of his mind.
• Hence, he took his calculator out and assuming
a modest return of 10 percent, he tried to
figure out that ‘undisclosed sum’.
• Solve!
2000 = P (1 + 0.10)2
2000 x (0.826) = P
1652 = P
Practice question 1
The future value of a sum of money is INR
25,00,000. Assuming a rate of interest of 7
percent, and the time period of waiting being 3
years, what is the present value of such amount?
25,00,000 = P (1 + 0.07)3
25,00,000 x (0.816) = P
20,40,000 = P
 NUMERICAL PROBLEMS ON PRESENT VALUE
P-1. Calculate the present value of Rs.600 one year from now . Rate of Interest being 5% p.a.
P-2. Calculate the present value of Rs.600 at the end of 5 years discounted @ 5% p.a.
P-3. What is the present value of Rs.1,000 received at the end of one year if discounted @
10% annually and semi annually.
P-4. What is the present value of Rs. 1,000 received at the end of one year if discounted
@10% quarterly.
P-5 What is the present value of Rs. 1,000 received at the end of one year if discounted
@10% monthly.
P-6 What is the present value of Rs. 1,000 received at the end of one year if discounted
@10% daily.
P-7 Rs.7,000 to be received 10 years from now, @7% is worth how much today?
P-8 Mr. Z owes a total of Rs.3,060 which included 12% interest for the 3 years he borrowed
the money for. How much did he originally borrowed?
Practice question 3
Ms. QWERTY has a retirement plan in line. She
would be receiving a pension of INR 25,000 a
year, for a period of 20 years. Assuming a rate of
interest being 6 percent, how much would the
amount be, in today’s value?
25000 = P (1 + 0.06)20
25000 x (11.470) = P
2,86,750 = P
Practice question 4
A government employee is 50 years of age as of
now. His retirement age is due at the age of 60.
While going through some of the retirement
plans, he found one of them very interesting.
Details are given as follows:
The employee would want to receive INR 2,00,000
per year for a period of 5 years. Rate of interest is
7 percent.

What would be the present value of such future

inflows!?!
2,00,000 = P (1 + 0.07)5
2,00,000 x (4.100) = P
8,20,000 = P
• Revision-
• Mrs. UW has two sums of INR 2 lakhs and 3.5
lakhs. She has maneuvered a betting deal
wherein she can sure shortly win INR one lakh.
This amount would be delivered to her at the end
of 1 year.
• On the other hand, she has the option of putting
into the bank both the amounts at the following
deals:

Principal : 2 lakhs Principal : 3.5 lakhs

Interest : 8 percent calculated quarterly Interest : 4 percent calculated quarterly
Time period : 1 year Time period : 1 year

Value from Table A – 1 = 1.082 Value from Table A – 1 = 1.041

As the financial advisor to Mrs. UW, can you
advise her as to which deal would be better for
her?
• P = 2 lakhs • P = 3.5 lakhs
• i = 8 percent quarterly • i = 4 percent quarterly
• T = 1 years • T = 1 years

A = P ( 1 + i)t = 3,50,000 (1 + 0.04/4)1*4

2,00,000 (1 + 0.08/4)1*4 = 3,50,000 (1 + 0.01)4
= 2,00,000 (1 + 0.02) 4 = 3,50,000 (1.041)
= 2,00,000 (1.082) = 3,64,350
= 2,16,400
Turquoise and Burgundy are two friends studying science
and arts subjects in their graduation. To sustain their
weekly expenses, they have been working part time.
While Turquoise started to work right from the first
semester, she instilled in herself a habit of saving money.
Now into her 21st month of the job, she has had two
promotions till now and is earning fine.
On the other hand, Burgundy was a bit lousy and only
released the need to start working part time after her
third semester got over. Like her best friend, she also has
developed a habit of saving but hasn’t earned enough till
now. To add, her promotion is due next week.

Their financial conditions speak as per their habits.

They have been approached by a representative
of ‘Pour La Finance Pvt Limited’, which is an
investment firm aimed to support working
students.
The representative communicated with both of
them at the same time and here are the details of
the investment proposal –

Total amount to be invested = INR 61,000

Rate of interest to be earned = 8% per annum
Time period = 7 years
A detailed look at the investment plan is as follows -

Time period Amount to be deposited

1 15,000
2 12,000
3 10,000
4 8,000
5 4,000
6 7,000
7 5,000

Rate of interest to be earned is INR 8% and number of years this investment plan is for - 7.

While Turquoise due to getting two promotions back to back,

found it appropriate to move forward with, her friend
Burgundy felt this was not feasible for her.
 On releasing such uneasiness, the representative
from ‘Pour La Finance Pvt Limited’ was quick
enough to swap the financial outlays of the
investment proposal and presented Burgundy
with an alternative one –
Time period Amount to be deposited
1 5,000
2 7,000
3 4,000
4 8,000
5 10,000
6 12,000
7 15,000

Rate of interest to be earned is INR 8% and number of years this investment plan is for - 7.
As a student of corporate finance, solve the
financials and then choose a related adjective
about the representative from below:

a) Cunning and smart

b) Helpful
 o ise
u
Turq
for
s
on
u lati
lc
Ca
Time Amount to be Number of years Compounded Future value
period deposited to be interest factor
compounded from Table A - 1
1 15,000 7 1.714 25,710
2 12,000 6 1.587 19,044
3 10,000 5 1.469 14,690
4 8,000 4 1.360 10,880
5 4,000 3 1.260 5,040
6 7,000 2 1.166 8,162
7 5,000 1 1.080 5,400
88,926

Total amount deposited = INR 61,000

Interest earned = INR 27,926
Total return = INR 88,926
 ndy
rg u
B u
for
s
tion
lcula
Ca Time Amount to be Number of years Compounded Future value
period deposited to be interest factor
compounded from Table A - 1
1 5,000 7 1.714 8,570
2 7,000 6 1.587 11,109
3 4,000 5 1.469 5,876
4 8,000 4 1.360 10,880
5 10,000 3 1.260 12,600
6 12,000 2 1.166 13,992
7 15,000 1 1.080 16,200
79,227

Total amount deposited = INR 61,000

Interest earned = INR 18,227
Total return = INR 79,227
Through this example, we realize that beyond
the
 overall investment amount ( P )
 interest rate ( i )
 time period of investment plan ( n )

some other particulars must also be given due

importance, amongst which ‘the amount of
cashflows going out each year’ is also a
significant concern.
The question to be asked is –

Is such scheme wanting an investor to provide

‘higher value cashflows’ in the beginning of the
time period?

If yes, that implies those ‘higher value cashflows’

will be able to generate more interest, as they
are going to be with the firm for a longer time
period.
Calculation of time period
How long would a sum of money take to double if
it grows at 14 percent annually?
A = P (1 + n)t
200 = 100 (1 + 0.14)t

Since it is a question of future value, hence

looking at Table A – 1, at the rate of interest of 14
percent, the factor nearest to 2.00 is 1.925.

Therefore, it would take 5 years to double the

sum of money at 14 percent interest rate.
Practice question 3
How long would a sum of money take to double if
it grows at 18 percent annually?
Practice question 4
How long will it take a sum of cash to multiply
itself to 3 times, if it grows at an annual rate of
interest of 8 percent?
Practice question 5
How long will it take to quadruple your money if
it grows at an annual rate of interest of 9
percent?

What about when the rate of interest is only 5

percent compounded annually?