Practice problem set

Time Value of Money

1. I have opened a Fixed Deposit of Rs. 1,000,000 that matures in 5
years. The interest and principal are both receivable at the end of 5
years. If the maturity value is Rs. 1,250,000, what is the rate of
interest?
2. As per the maintenance contract I have entered into for maintaining
the computer systems in my organization, I have to pay the following
amounts for the 15 systems:

Year 1
Year 2
Year 3

Rs. 15,000
Rs. 20,000
Rs. 30,000

What is the Present Value of the contract payments? Assume a

discount rate of 12%.
3. A machine costing Rs. 1,500,000 is depreciated using the Straight-Line
Method. There is no salvage value and the depreciation rate is 10%.
Compute the Present Value of the depreciation amounts using a
discount rate of 10%.
4. Mrs. Das receives alimony of Rs. 120,000 every year. Assuming she
will receive the alimony for another 5 years, what will be the Future
Value of her receipts? Assume an interest rate of 15%.
5. An organization has 5 members on its Board. The Board meets once
every quarter. The sitting fee for each member is Rs. 20,000.
Assuming an interest rate of 15%, find out the Future Value of sitting
fee payments to the Board for the next 3 years.
6. A club charges Rs. 250,000 as a lifetime membership fee. The other
option is to pay an annual fee of Rs. 40,000 for ten years, after which
the membership becomes for life. Assuming an interest rate of 12%,
which is the better option? At what rate will you be indifferent?

7. You have a choice of buying a vehicle for Rs. 500,000 by paying the
entire amount now or by paying it in quarterly installments of Rs.
35,000 for 5 years. If your opportunity cost is 12%, which would you
prefer? At what discount rate would you be indifferent?
8. My son would like to start a business after 6 years, for which he would
like me (Ive used a very mild word!!) to loan him (ha!) Rs. 20 lakhs.
Assuming I can save 20% of my income and assuming my income
increases by 10% every year, how much should I be earning now in
order to meet my sons requirement? (Assume an interest rate of 15%.
Assume all savings take place at the end of the year the first saving
will be at the end of Year 1)
9. Suppose I want to gift my wife a diamond necklace worth Rs. 2 lakhs
on her 50th birthday, which falls 5 years from today (thats a BIG
suppose!!). I can either buy it now by paying cash or buy it by paying
5 installments of Rs. 50,000, Rs. 60,000, Rs. 70,000, Rs. 80,000 and
Rs. 90,000 at the end of Years 1 to 5. Assuming my opportunity cost of
money is 20%, which option should I choose? At what rate of interest
would I be indifferent to the two choices?
10.
I would like to buy a Mercedes ten years from now (Assume it
would cost Rs. 35 lakhs then). I will be able to set aside Rs. 1 lakh
from my earnings every year. I have an insurance policy which will
mature 5 years from now that would give me an additional Rs. 5
lakhs. Mr Hughes Grant of NPA Incorporated would like to give me a
huge grant (interest free, of course) to fund this purchase. What is the
minimum amount of grant I must receive? Assume an interest rate of
12%.
11.
I need an amount of Rs. 50 lakhs 3 years from now to start my
School. I have Rs. 5 lakhs with me. I also have a bond which will
mature in 5 years with a maturity value of Rs. 10 lakhs. The credit
officer of a Bank has agreed to give me a loan after three years the
amount being equivalent to 75% of the present value of the bond. The
balance amount I plan to generate through a concert (where I will be
singing and performing) that I will hold 2 years from now. Assuming
the tickets will be priced at Rs. 500, how many people must attend the

show for me to start the School in 3 years? (Assume an interest rate of

10%). The concert expenses will be Rs. 10L. Both the expenses and
the revenue from the concert can be assumed at the end of Year 2.
12.
Suppose, continuing the above problem, people are willing to pay
a price of Rs. 1,000 per ticket for me to cancel the concert and not
sing, how many people should buy the tickets for me to start my
School in 3 years?
13.
Three friends equally distributed their total monies available
each landed with Rs. 10,000. They agreed to meet 5 years later. The
person who generated the maximum return from this Rs. 10,000 will be
declared the winner. Friend A invested Rs. 10,000 in a fixed deposit
that gives him a compound return of 14% for a period of 5 years.
Friend B purchased a bond for Rs. 10,000. The bond will have a
maturity value of Rs. 10,000 after 5 years and pay a coupon (interest)
of Rs. 1,000 every year. Friend B will invest this coupon in the stock
market and generate an average compound return of 15% during the
period of 5 years. Friend C invested the entire Rs. 10,000 in the stock
market in high-risk stocks. He expected to annually generate a 25%
return on 40%of the portfolio, a 10% return on 40% of the portfolio and
a 10% loss on the balance 20%. Who was the winner?
14.
I plan to host a gala CBS alumni event (obviously fully funded by
the alumni) 5 years from now at an estimated cost of Rs. 50L. I plan to
collect Rs. 1,000 per student from this batch (assume this will be done
1 year from now), Rs. 1,500 per student from the next batch, Rs. 2,000
per student from the batch after that and Rs. 5,000 per student for the
next two batches. The alumni of the past batches has agreed to
donate Rs. 10L at the end of the third year. Assuming the student
intake would grow at a rate of 10% from the next batch onwards, how
many students should join in the next batch for me to successfully host
the event? Assume an interest rate of 24%.