Time Value of Money

Practice Questions

Q.1.
An investor deposits Rs. 1,00,000 in a bank account for 5 years at 8% interest. Find out the amount which he will have in his account if interest is compounded:Annually Semi-annually Quarterly Continuously

y y y y

Q.2.
Determine the present value of Rs. 500 assuming 5% interest rate for the followings:y Received one year from now y Received at the end of 5th year y Received at the end of 15th year

Q.3.
You are planning to buy a 200 square meters of land for Rs. 40,000. You will be required to pay twenty equal annual installments of Rs. 8,213. What compound rate of interest you would be paying?

Q.4.
Mahesh takes a five year car loan for buying Tata Nano for Rs. 1,00,000 where he has to pay annual payments at a rate of 10%. Calculate his annual payments and prepare the amortization schedule for loan repayment.

Q.5
You buy a house for Rs. 5,00,000 and immediately make cash payment of Rs. 1 lakh. You finance the balance at 12% for 20 years with equal installments. How much are the annual installments? How much of the each payment goes towards reducing the principal?

Q.6
An executive is retiring. He has been given the following option w.r.t. to retirement plans:y A lump sum of Rs. 20,00,000 at the retirement y An annuity of Rs. 2,50,000 for next 10 years, assuming the interest rate to be 10%. Which option should he go for?

Q.7
Mr. X will retire in next 9 years and from the 10th year he will start receiving the pension of Rs. 2,000 p.a. The pension will continue for 16 years after the retirement. Calculate the present value of the retirement, if discount rate 10% is used.

Q.8
Mr. X is planning for his retirement. Currently he is of 45 years and he would like to have Rs. 25,00,000 when he retires at the age of 60. He can deposit a sum of money every year which will yield 12% in state bank of India for 15 years. How much should he deposit each year to have Rs. 25,00,000 after 15 years.

Q.9
Suresh wants to determine the sum of money he will have in his savings account at the end of 6 years by depositing Rs. 1,000 each year for the next 6 years. The annual interest rate is 8%.

Q.10
A finance company advertises that it will pay a lump sum of Rs. 8,115 at the end of 6 years to the investors who deposits annually Rs. 1,000 for 6 years. What interest rate is implicit in this offer?

Q.11
A mortgage requires you to pay Rs. 70,000 at the end of each of the next eight years.The interest rate is 8%.
y What is the present value of these payments? y Calculate for each year the loan balance that remains

outstanding , the interest payment on the loan, and the reduction in the loan balance.

Q.12
If you deposit Rs. 10,000 today at 8%, how long it will take to double the amount invested?

Q.13
A deep discount bond is issued for Rs. 6553 today and it will mature after 5 years for Rs. 20,000. What is the implicit rate of interest?

Q.14
As a winner of a breakfast cereal competition, you can choose one of the following prizes:y Rs. 1,00,000 now y Rs. 1,80,000 at the end of five years y Rs. 11,400 a year forever y Rs. 19,000 for each of 10 years

If the interest rate is 12%, which is the most valuable prize?

Q. 15
XYZ limited is creating a sinking fund to redeem its preference share capital of Rs. 5,00,000 issued on 01.01.2006 and maturing on 31.12.2017. The annual payments will start on 01.01.2006. The company wants to invest equal amount every year which will earn 12% p.a. How much is the amount of sinking fund annuity?

Q. 16
y Calculate the present value at 12% of the following cash

flows:
Year Cash inflow

1 2 3 4 5 6 7 8

3,000 3,000 3,000 6,000 6,000 6,000 6,000 6,000

Q. 17
Mr. Daya saved Rs. 5 coin for 65 years. When he finally decided to cash them in, he had roughly 5 million rupees (not the coins) , filling 40 trash cans. On average, the man saved Rs. 76,923 worth a year. If he had deposited the coin saved each year, at the end of the year, into a savings account earning 5%, how much would he have in his account after 65 years of saving? How much more money would this have meant for this 5 rupee saver compared with simply putting his coins into trash can?