11.
A leading bank has chosen you as the winner of its quiz
competition and asked you to choose from one of the following
alternatives for the prize: (a) ₹60,000 in cash immediately or (b)
an annual payment of ₹10,000 for the next 10 yea₹If the interest
rate you can look forward to for a safe investment is 9 percent,
which option would you choose?
Solution:
Compare between Rs 60 K immediately and present value of the
annuity and choose the better one.
The present value of an annual payment of ₹10,000 for 10 years
when r = 9% is:
10,000 x PVIFA ( 9 %, 10 years)
= 10,000 x 6.418 = ₹64, 180
Answer: ?
What is the present value of a annual income of
₹3,00,000 forever if the interest rate is 15%?
Solution:
PVP = A/r
= ₹3,00,000 / 0.15
= ₹20,00,000
TB Q 9) What is the present value of a 5 year
annuity of ₹2000 at 10%?
Solution:
Assuming that it is an ordinary annuity, the present
value is:
₹ 2,000 x PVIFA (10%, 5years)
= ₹ 2,000 x 3.791 = ₹ 7,582
TB Q 11) What is the present value of an income
stream that provides ₹ 2000 a year for first 5 years
and ₹ 3000 a year forever thereafter, if the discount
rate is10%?
Solution:
The present value of the income stream is:
₹ 2,000 x PVIFA (10%, 5 years) +
₹ 3000/0.10 x PVIF (10%, 5 years)
= ₹ 2,000 x 3.791 + ₹ 3000/0.10 x 0.621
= ₹ 26,212
14. Mr. Ganapathi will retire from service in five years .How
much should he deposit now to earn an annual income of
₹240,000 forever beginning from the end of 6 years from now ?
The deposit earns 12 percent per year.
Solution:
Find the present value of perpetuity at beginning of Year 6 i.e .End
of Year 5.
Find the present value of the of the lumpsum at end of year 5 to
now
To earn an annual income of ₹240,000 forever, starting from the
end of 6 years, the single amount to be deposited at end of year 5
= A / r = ₹240,000 / 0.12
= ₹2,000,000
The amount that must be deposited now to get this amount at end
of year 5 is: ₹2, 000,000 X PVIF (12%, 5 years)
= ₹2, 000,000 x 0.567 = ₹1,134,000
TB Q 13) You make a deposit of ₹ 20,000 and get ₹ 4,000 annually for 10
yea₹What is the interest rate earned on the deposit?
Solution:
₹ 20,000 = ₹ 4,000 x PVIFA (r, 10 years)
PVIFA (r,10 years) = ₹ 20,000 / ₹ 4,000 = 5.00
From the tables we find that:
PVIFA (15%, 10 years) = 5.019
PVIFA (18%, 10 years) = 4.494
Using linear interpolation we get:
5.019 – 5.00
r = 15% + ---------------- x 3%
5.019 – 4.494
= 15.1%
TB Q 14) Find the PV of Stream of cash:
Solution:
PV (Stream A) = ₹ ₹100 x PVIF (12%, 1 year) + ₹200 x
PVIF (12%, 2 years) + ₹300 x PVIF(12%, 3 years) + ₹400 x
PVIF (12%, 4 years) + ₹500 x PVIF (12%, 5 years) +
₹600 x PVIF (12%, 6 years) + ₹700 x PVIF (12%, 7 years) +
₹800 x PVIF (12%, 8 years) + ₹900 x PVIF (12%, 9 years) +
₹1,000 x PVIF (12%, 10 years)
= ₹100 x 0.893 + ₹200 x 0.797 + ₹300 x 0.712
+ ₹400 x 0.636 + ₹500 x 0.567 + ₹600 x 0.507
+ ₹700 x 0.452 + ₹800 x 0.404 + ₹900 x 0.361
+ ₹1,000 x 0.322
= ₹2590.9
Similarly Calculate for Stream B
But Stream C is an annuity. So the PVIFA could be applied.
TB Q 15)
It will grow to 10,000(1+0.16/4)4x5 = Rs. 21,911
TB Q 16)
It will be equal to 5,000(1+0.12/4)5x4 = Rs. 9,031
