1 If you invest Rs.

5,000 today at a compound interest of 9 per cent, what will be its future
value after 75 years?
Solution The future value of Rs. 5,000 after 75 years, when it earns a compound interest of 9
per cent, is Rs. 5,000 (1.09)75
Since the FVIF table given in Appendix A has a maximum period of 30, the future value
expression may be stated as Rs. 5,000 (1.09)30 (1.09)30 (1.09)15
The above product is equal to Rs. 5,000 (13.268) (13.268) (3.642) = Rs. 32,05,685.1
2 If the interest rate is 12 per cent, what are the doubling periods as per the rule of 72 and the
rule of 69 respectively?
Solution As per the rule of 72 the doubling period will be 72/12 = 6 years As per the rule of
69, the doubling period will be 0.35 + 69 12 = 6.1 years
3 A borrower offers 16 per cent nominal rate of interest with quarterly compounding. What is
the effective rate of interest?
Solution The effective rate of interest is (1+016) -1 = (1.04)-1 = 1.17-1 = 0.17 17 percent
4 Fifteen annual payments of Rs. 5,000 are made into a deposit account that pays 14 percent
interest per year. What is the future value of this annuity at the end of 15 years? Solution The
future value of this annuity will be: Rs. 5,000 (FVIFA14%,15) Rs. 5,000 (43.842) = Rs.
2,19,210
5 A finance company advertises that it will pay a lumpsum of Rs. 44,650 at the end of five
years to investors who deposit annually Rs. 6,000 for 5 years. What is the interest rate implicit
in this offer? Solution The interest rate may be calculated in two steps (a) Find the FVIFA for
this contract as follows: Rs. 6,000 (FVIFA) = Rs. 44,650 So FVIFA = Rs.44.650
Rs.6,000 = 7.442
(b) Look at the FVIFA table and read the row corresponding to 5 years until 7.4 or a value
close to it is reached. Doing so we find that FVIFA20% 5yrs is 7.442 So, we conclude that the
interest rate is 20 percent.
6.6 What is the present value of Rs. 1,000,000 receivable 60 years from now, if the dis count
rate is 10 percent ?
Solution The present value is This may = Rs * 0.1 ,000,000(0.057)(0.057)=Rs.3249 Rs,
1000000 * (1/1.1) ^ 60 Rs * 0.1, 0 * (1/1.1) ^ 30 * (1/1.1) ^ 30
6.7 A 12-payment annuity of Rs. 10,000 will begin 8 years hence. (The first payment occurs at
the end of 8 years.) What is the present value of this annuity if the discount rate is 14 percent?
Solution This problem may be solved in two steps.
Step 1: Determine the value of this annuity a year before the first payment begins, i.e., 7 years
from now. This is equal to: Rs. 10,000 (PVIFA 14%, 12 years) = Rs. 10,000 (5.660) = Rs *
0.56 ,600 Step 2: Compute the present value of the amount obtained in Step 1: Rs. 56,600
(PVIF 14%, 7 years )=Rs,56,600(0.400) = Rs * 0.22 ,640
6.8 What is the present value of the following stream if the discount rate is 14 percent?
6.9 Mahesh deposits Rs. 200,000 in a bank account which pays 10 percent interest. How much
can he withdraw annually for a period of 15 years?
Solution The annual withdrawal is equal to: Rs.200,000 PVIFA 10\% n 15ys = (Rs * 0.2, 0)/(7,
606) = Rs * 0.26 ,295
6.10 You want to take a world tour which costs Rs. 1,000,000 the cost is expected to remain
unchanged in nominal terms. You are willing to save annually Rs. 80,000 to fulfill your desire.
How long will you have to wait if your savings earn a return of 14 percent per annum?
Solution The future value of an annuity of Rs. 80,000 Equated to Rs. 1,000,000. 80,000 ×
FVIFA=7,14% = 1,000,000 80000((1.14 ^ n - 1)/0.14) = 1000000 1.14 ^ pi - 1 =
1000000/80000 * 0.14 = 1.75 1.14 ^ n = 1.75 + 1 = 2.75 n * log(1.14) = log(2.75) n * 0.0569
= 0.4393 n = 0.4393/0.0569 = 7.72 years that earns 14 percent is You will have to wait for 7.72
years.
6.11 Shyam borrows Rs. 80,000 for a musical system at a monthly interest of 1.25 per cent.
The loan is to be repaid in 12 equal monthly instalments, payable at the end of each month.
Prepare the loan amortisation schedule.
Solution The monthly installment A is obtained by solving the equation : 80,000 A x
PVIFA=12,71.25% 80000 = A * (1 - 1/((1 + r) ^ n))/r 80000 = A * (1 - 1/((1.0125) ^ 12))/0.0125
= A * 11.0786 Hence A = 80000/11.0786 = Rs 7221
6.1 Calculate the value 5 years hence of a deposit of Rs. 1,000 made today if the interest rate
is (a) 8 percent, (b) 10 percent, (c) 12 percent, and (d) 15 percent.
6.2 If you deposit Rs. 5,000 today at 12 percent rate of interest in how many years (roughly)
will this amount grow to Rs. 1,60,000? Work this problem using the rule of 72-do not use
tables.
6.3 A finance company offers to give Rs. 8,000 after 12 years in return for Rs. 1,000 deposited
today. Using the rule of 72, figure out the approximate interest offered.
6.4 You can save Rs. 2,000 a year for 5 years, and Rs. 3,000 a year for 10 years thereafter.
What will these savings cumulate to at the end of 15 years, if the rate of interest is 10 percent?
6.5 Mr. Vinay plans to send his son for higher studies abroad after 10 years. He expects the
cost of these studies to be Rs. 100,000. How much should he save annually to have a sum of
Rs. 100,000 at the end of 10 years, if the interest rate is 12 percent?
6.6 A finance company advertises that it will pay a lump sum of Rs. 10,000 at the end of 6
years to investors who deposit annually Rs. 1,000. What interest rate is implicit in this offer?
6.7 Someone promises to give you Rs. 5,000 after 10 years in exchange for Rs. 1,000 today.
What interest rate is implicit in this offer?
6.8 Find the present value of Rs. 10,000 receivable after 8 years if the rate of discount is (i) 10
percent, (ii) 12 percent, and (iii) 15 percent.
6.9 What is the present value of a 5-year annuity of Rs. 2,000 at 10 percent ?
6.10 At the time of his retirement, Mr. Jingo is given a choice between two alternatives:
(a) an annual pension of Rs. 10,000 as long as he lives, and (b) a lump sum amount of Rs.
50,000. If Mr.Jingo expects to live for 15 years and the interest rate is 15 percent, which option
appears more attractive?

6.11 Mr. X deposits Rs. 100,000 in a bank which pays 10 percent interest. How much can he
withdraw annually for a period of 30 years. Assume that at the end of 30 years the amount
deposited will whittle down to zero. 6.12 What is the present value of an income stream which
provides Rs. 1,000 at the end of year one, Rs. 2,500 at the end of year two, and Rs. 5,000 during
each of the years 3 through 10, if the discount rate is 12 percent ?
6.13 What is the present value of an income stream which provides Rs. 2,000 a year for the
first five years and Rs. 3,000 a year forever thereafter, if the discount rate is 10 percent ?
Hint: The present value for a perpetual annuity is derived by dividing the constant annual flow
by the discount factor.
6.14 What amount must be deposited today in order to earn an annual income of Rs. 5,000
beginning from the end of 15 years from now? The deposit earns 10 percent per year.
6.15 Suppose someone offers you the following financial contract. If you deposit Rs. 20,000
with him he promises to pay Rs. 4,000 annually for 10 years. What interest rate would you earn
on this deposit?
6.16 What is the present value of the following cash flow streams?
6.17 Suppose you deposit Rs. 10,000 with an investment company which pays 16 percent
interest with quarterly compounding. How much will this deposit grow to in 5 years? 6.18 How
much would a deposit of Rs. 5,000 at the end of 5 years be, if the interest rate is 12 percent and
if the compounding is done quarterly? 6.19 What is the difference between the effective rate of
interest and stated rate of interest in the following cases:
Case A: Stated rate of interest is 12 percent and the frequency of compounding is times a year.
Case B: Stated rate of interest is 24 percent and the frequency of compounding is four times a
year. Case C. Stated rate of interest is 24 percent and the frequency of compounding is twelve
times a year. 12 percent how much investment is required now to yield an
6.20 If the interest rate is income of Rs. 12,000 per year from the beginning of the 10th year
and continuing thereafter forever ?
6.21 You have a choice between Rs. 5,000 now and Rs. 20,000 after 10 years. Which would
you choose? What does your preference indicate?
6.22 Mr. Raghu deposits Rs. 10,000 in a bank now. The interest rate is 10 percent and
compounding is done semi-annually. What will the deposit grow to after 10 years? If the
inflation rate is 8 percent per year, what will be the value of the deposit after 10 years in terms
of the current rupee? 6.23 How much should be deposited at the beginning of each year for 10
years in order to provide a sum of Rs. 50,000 at the end of 10 years?
6.24 A person requires Rs. 20,000 at the beginning of each year from 2005 to 2009. How much
should he deposit at the end of each year from 1995 to 2000? The interest rate is 12 percent.
6.25 What is the present value of Rs. 2,000 receivable annually for 30 years? The first receipt
occurs after 10 years and the discount rate is 10 percent.
6.26 After five years Mr. Ramesh will receive a pension of Rs. 600 per month for 15 years.
How much can Mr. Ramesh borrow now at 12 percent interest so that the borrowed amount
can be paid with 30 percent of the pension amount? The interest will be accumulated till the
first pension amount becomes receivable.
6.27 Mr. Prakash buys a scooter with a bank loan of Rs. 6,000. An instalment of Rs. 300 is
payable to the bank for each of 24 months towards the repayment of loan with inter est. What
interest rate does the bank charge?
6.28 South India Corporation has to retire Rs. 10 million of debentures each at the end of 8, 9,
and 10 years from now. How much should the firm deposit in a sinking fund account annually
for 5 years, in order to meet the debenture retirement need? The net interest rate earned is 8
percent.
6.29 Mr.Longman receives a provident fund amount or Rs. 1,00,000. He deposits it in a bank
which pays 10 percent interest. If he withdraws annually Rs. 20,000, how long can he do so?
6.30 Phoenix Company borrows Rs. 500,000 at an interest rate of 14 percent. The loan is to be
repaid in 4 equal annual instalments payable at the end of each of the next 4 years Prepare the
loan amortisation schedule.
6.31 You want to borrow Rs. 1,500,000 to buy a flat. You approach a housing company which
charges 13 percent interest. You can pay Rs. 200,000 per year toward loan amortisation. What
should be the maturity period of the loan?
6.32 You are negotiating with the government the right to mine 100,000 tons of iron ore per
year for 15 years. The current price per ton of iron is Rs. 3000 and it is expected to increase at
the rate of 6 percent per year. What is the present value of the iron ore that you can mine if the
discount rate is 16 percent?
6.33 As a winner of a competition, you can choose one of the following prizes:
a. Rs. 500,000 now
b. Rs. 1,000,000 at the end of 6 years
c. Rs. 60,000 a year forever
d. Rs. 100,000 per year for 10 years
e. Rs. 35,000 next year and rising thereafter by 5 percent per year forever. If the interest rate is
10 percent, which prize has the highest present value.
6.34 Pipe India owns an oil pipeline which will generate Rs. 120 million of cash income in the
coming year. It has a very long life with virtually negligible operating costs. The volume of oil
shipped, however, will decline over time and, hence, cash flows will decrease by 3 percent per
year. The discount rate is 12 percent.
a. If the pipeline is used forever, what is the present value of its cash flows?
b. If the pipeline is scrapped after 25 years, what is the present value of its cash flows?
6.35 An oil well presently produces 50,000 barrels per year. It will last for 15 years more, but
the production will fall by 5 percent per year. Oil prices are expected to increase by 3 percent
per year. Presently the price of oil is $50 per barrel. What is the present value of the well's
production if the discount rate is 10 percent?

6.36 An oil well presently produces 80,000 barrels per year. It will last for 20 years more, but
the production will fall by 6 percent per year. Oil prices are expected to increase by 4 percent
per year. Currently the price of oil is $60 per barrel. What is the present value of the well's
production if the discount rate is 12 percent?
6.37 You are considering whether your savings will be enough to meet your retirement needs.
You saved Rs. 100,000 last year and you expect your annual savings to increase by 8 percent
per year for the next 20 years. If your savings can be invested at 9 percent, how much would
you have at the end of the twentieth year?
6.38 A bank offers an interest rate of 8 percent on deposits made with it. If the compound- ing
is done on a weekly basis, what is the effective interest rate?