Assignment 1

1. How much money can you borrow now if you repay the lender Rs. 850 in 2
years and the interest rate is 6% compounded yearly?
2. If you invest Rs. 10,000 now in a business venture that promises to return Rs.
14,641, how soon must you receive the Rs. 14,641 in order to make at least a
10% per year return compounded annually on your investment?
3. Your uncle has agreed to make five Rs. 700 per year deposits into a savings
account for you starting now. You have in turn agreed not to withdraw any
money until the end of year 9, at which time you plan to remove Rs. 3000
from the account. Further, you plan to withdraw the remaining amount in 3
equal year-end installments after the initial withdrawal. Diagram the cash
flows for your uncle and for yourself. Interest rate is 8%.
4. If you invest Rs. 4100 now and receive Rs. 7500 five years from now, what is
the rate of return on your investment? Define the economy symbols and
construct the cash-flow diagram
5. How much money would be accumulated in 6 years if a person deposited Rs.
500 now and the deposits increase by Rs. 50 per year for the next 6 years?
Assume i is 16% per year and draw the cash-flow diagram.
6. A company is planning to make 2 equal deposits such that 10 years from now,
the company will have Rs. 49,000 to replace a small machine. If the first
deposit is to be made 2 years from now and the second is to be made 8 years
from now, how much must be deposited each time if the interest rate is 15%
per year?
7. If a college student can save Rs. 600 per year from her part-time job, how long
will it take her to save enough money to purchase a Rs. 2,500 bicycle if she
can get 10% per year interest on her money?
8. For the cash flow below, calculate (a) the equivalent uniform annual cost in
years 1 through 5 and (b) the present worth of the cash flow. Assume that the
interest rate is 12% per year.
Year
Cash Flow (Rs.)

1
5000

2
5400

3
5800

4
6200

5
6600

9. For the diagram shown below, find the value of x that will make the negative
cash flows equal to the positive cash flow of Rs. 800 at time 0. Assume that
i=15% per year.
Rs. 800

4
Year

100

150

200

X?

10. A company borrows Rs. 15,000 at an interest rate of 15% per year with the
agreement that the loan will be repaid over an 8 year period. The repayment
scheme will be such that each payment will be Rs. 250 larger than the
preceding one, with the first payment to be made 1 year after the loan is
negotiated. Determine the amount of the third payment.
11. Assume that a company wants to have Rs. 5,00,000 available for investment
10 years from now. The company plans to invest Rs. 4,000 the first year, and
amounts increasing by a uniform gradient thereafter. If the companys interest
rate is 20% per year, what must be the size of the gradient in order for the
company to meet its objective?
12. A businessman purchased an existing building and found that the ceiling was
poorly insulated. He estimated that with 6 inches of foam insulation, he could
cut the heating bill by Rs. 25 per month and the air-conditioning cost by Rs.
20 per month. Assuming that the winter season is the first 6 months of the year
and the summer season is the next 6 months, how much can he afford to spend
on insulation if he expects to keep the building for only 2 years? i= 1.5% per
month?
13. A woman plans to make a total of 8 deposits, with the first deposit now and
succeeding deposits at 1-year intervals, so that she will be able to withdraw
Rs. 4000 per year for the next 10 years, the first withdrawal starting 16 years
from now. How much must she deposit each year if the interest rate is a
nominal 12% per year compounded quarterly?
14. If a machine costs Rs. 15,000 to purchase and the operating costs are Rs. 1000
at the end of the first year, Rs. 1200 at the end of the second and amounts
increasing by Rs. 200 per year through year 12, what is the present worth of
the machine if the interest rate is a nominal 15% per year compounded semiannually?
15. If a company can buy an equipment for Rs. 6,00,000 with the expectation of
spending Rs. 48,000 per year for operation and maintenance, how much could
it afford to spend on a new one if its annual cost would be only Rs. 38,000 per
year? Assume that the salvage values will be 10% of the first cost and that
both machines will have a 5 year life. Use i=15% and f=10% per year.