FINANCIAL MANAGEMENT ASSIGMENT 1

Date of Submission: 19/06/2013

:- Submitted By i) ii) iii) iv) Arjun Kurane Bhaskar Vishal Bhavna Kaul Chandan Kumar 2013B09 -2013B10 -2013B11 -2013B12

Time Value Assignment 1 (Lump Sum Problems)

FV=PV(1+r)t FV=1000000(1.13)3 Fv=Rs 144289.7 So, Rs. 1000000 will grow to Rs. 144289.7 in 3 years.

2)

The money invested in Kissan Vikas Patra today doubles in eight years months. What is the approximate rate of interest per annum? Let PV = 100 FV =200 Time= 8.5 years

and six

Solution:

FV = PV (1 + r) t 200 = 100 (1 + r) 8.5 (1 + r) = 8.52 = 1.085 R = 1.085-1 = 0.085 = 8.5% Therefore R=8.5%

3)

The present value of Rs 4,500 receivable in 7 years at a discount rate of 15% is? FV=Rs.4500, T=7yrs, Rate=15%

Solution:

FV=PV(1+r/100)t 4500=PV(1+15/100)7 Therefore PV=Rs1691.71

4)

A client invests Rs 500,000 in a bond fund projected to earn 8% annually. Estimate the value of her investment in 10 years.

Solution: The value of the investment on bonds worth 500000 at 8% interest for a period of 10 years = FV=PV(1+r/100)t = 500000(1+8/100)10 =Rs10794624.99

= Rs10,79,46,250/Therefore the value of her investment will be Rs. 10,79,46,250. 5) If you deposit Rs 10,000 today at 12% rate of interest, in how many years this amount grow to Rs 80,000. PV=10,000 Rate( r )=12% FV=80,000. Time(t)=? does

Solution:

FV=PV(1+r)t 80000=10000(1.12)t T= log 8 /log1.12 T=18.35 years. Rs.10000 will grow to Rs.80000 in 18.35 years. 6) What is the effective rate of interest on an investment with a coupon rate of 12% when compounded a) monthly b) quarterly Solution: FV = PV (1 + r) t Let PV = 1, Case 1: 12% compounded monthly FV = 1 (1 + 0.12/12) 12 FV = (1 + .01)12 FV = 1.1268 therefore, effective rate =12.68 %

Case 2: 12% compounded Quarterly FV = 1 (1 + .12/4) 4 FV = (1+ 0.03)4 = 1.1255 therefore, effective rate =12.55 %

7) If a borrower promises to pay Rs 20,000 eight years from now in return for a loan of Rs 12,550 today, what effective annual interest rate is being offered? Sol: PV=Rs.12550, FV=PV(1+r/100)t 20000=12550(1+r/100)8 1.59=(1+r/100)8 1.059=1+r/100 0.059=r/100 => r=5.99% FV=Rs.20,000, T=8

8) How much should a company invest now in order to repay debentures (loan) of Rs 2.5 million that will mature at the end of 7 years. The company can earn an interest of 12% on its investment. Solution- 1 million =1000000 Future value= 2.5 million Rate =12% Present value = 2.5 X 1000000/(1+12/100)7= Rs 11,30,873.03 9) Deven has just received a cash gift of Rs500,000 from his rich eccentric uncle. He wants to set it aside to pay for his daughter Anishas college education. Anisha will begin college in 10 years and Devens financial advisor says that he can earn 12% interest on an investment in a special college fund. How much will Deven have in the fund when Anishal begins college? Solution: PV=Rs.500,000 Time(t)=10 years. Rate( r )= 12% FV=PV(1+r)t FV=500000(1.12)10 FV=Rs.1552924.104. Deven will have Rs.15,52,924.10 when Anisha begins college. 10) Shawn wants to buy a new telescope. He estimates that it will take him one year to save the money and that the telescope will cost $200. At an interest rate of 6%, how much does Shawn need to set aside today to purchase the telescope in one year? Solution: FV= 200 r = 6% time = 1year time period = 7 years

FV = PV (1 + r) t or PV = FV / (1 + r) t PV = 200 / (1 + .06)1 PV = $ 188.68 11) Bridgettes grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? Sol: Case 1: Not buying Karaoke PV=$500, FV=?, t=8yrs, rate=3.5%

FV=PV(1+r/100)t FV= 500(1+3.5/100)8 FV=500(1.035)8

FV=500*1.32 FV=$660 Case 2: Buying Karaoke PV=$500-$150=$350, FV= 350(1+3.5/100)8 FV=350(1.035)8 FV=350*1.32=462 Difference= $660-$462= $198 12) Joe is getting ready to buy a car. He has $20,000 in investments earning 4.9% annually. The car also costs $20,000. If he doesnt pay cash for the car, Joe can get a loan at 2.9% interest for 5 years. The loan is structured so that Joe pays one balloon payment at the end of 5 years. The balloon payment includes the principal plus all interest accrued over 5 years. If Joe takes the loan will he have enough money available from his investments to make the balloon payment? How much will he be short/have to spare? SolutionFV of $20000 @ 4.9 % interest rate for a period of 5 years = 20000(1+4.9/100)^5= $25,404.30. Cost of car worth $20000 if taken on loan @2.9% for a period of 5 years = 20000(1+2.9/100)^5=$23,073.14 Hence joe must go with the loan as he will have surplus of $2331.15 at the end of 5 years from his investment. 13) The credit card company states that the interest rate is 3.40% monthly or 40.80% annually. What is the effective interest rate if the interest is compounded monthly. Solution: Let PV = 1, FV = PV (1 + r) t FV = 1(1+40.80/12*100)12 = 1.4936 Effective rate = 49.36% 14) Determine the present value of cash inflows of Rs 3,000 at the end of each year for the next 4 years, and 7000 and 1,000 respectively at the end of year 5 and 6. The appropriate discount rate is 14% Solution: Rate = 14%, FV = PV (1 + r) t T=1 year or 12 months, R=40.80% annually FV=?, t=8yrs, rate=3.5%

Year 1=> P=3000, PV = 3000/(1+.14) =2631.57

Year 2=> P=3000, PV = 3000/(1+.14)2 =2308.40 Year 3=> P=3000, PV = 3000/(1+.14)3 =2024.91 Year 4=> P=3000, PV = 3000/(1+.14)4 =1776.24 Year 5=> P=7000, PV = 7000/(1+.14)5 =3635.58 Year 6=> P=1000, PV = 1000/(1+.14)6 =455.58 So net present value will be = 12832.28 15-16. Assume that you are given a choice between incurring an immediate outlay of Rs 9,000 and having to pay Rs 2,310 a year for 5 years (first payment due one year from now); the discount rate is 11 percent. What would be your choice? Will your answer change if Rs 2,310 Is paid at the beginning of each year for 5 years. ? Solution: year 1 st year 2nd year 3rd year 4th year 5th year Total Rate = 11% Using FV=PV(1+r/100)^t Present value 2310 2310 2310 2310 2310 Value At the end of year 2081.08 1874.85 1689.05 1521.67 1370.87 8538.72 Value at the beginning of year 2310.00 2081.08 1874.85 1689.05 1521.67 9476.65

Yes going with the investment option of paying 2310 at the end of the year is better option. Yes the answer changed when the money was paid at the start of the year rather than at end of the year. 17) Juan has $100,000 to invest and he has narrowed down his decision to two investments. Option A returns 60% annually for 4 years, but the maximum investment he can make is $10,000. Option B returns 12% annually for 4 years and would require the entire $100,000. Which option produces the best result for Juan and what is the benefit over the lesser option? Assume that the $90,000 not invested in Option A would be placed in a safe deposit box earning no interest. Solution: Option A: PV=$10,000. Rate( r)=60% Time( t )=4 years. FV=PV(1+r)t FV=10,000(1.6)4 Option B: PV=$100000 Rate(r)=12% Time( t)=4 years. FV=PV(1+r)t FV=100000(1.12)4

FV=65536.+90,000 deposit box) FV=$1,55,536.

(amount

in

safe FV=$1,57,351.93

Therefore investing in option B is a better decision as Juan will gain $1815.94 . 18) Rondo is in the market for a new car. He has narrowed his search down to 2 models. Model A costs $32,000 and Model B costs $28,000. With both cars he plans to pay cash and own them for 4 years before trading in for a new car. His research indicates that the trade in value for Model A after 4 years is 60% of the initial purchase price, while the trade in value for Model B is 45%. The interest rate is 5%. For simplicity assume that operating and maintenance costs for the models are identical. Which model is the better decision and how much "cheaper" is it than the alternative? Ans: Model A PV = 32000 r= 5% FV = PV (1 + r) t FV = 32000(1+.05)4 = 38896.20. Resale value = 60% of 32000 = 19200 Net = - 38896.20 + 19200 = -19696.20 (-ve means cash outflow) time = 4 years

Model B: PV = 28000 r= 5% FV = PV (1 + r) t FV = 28000 (1+.05)4 = 34034.17. Resale value = 45% of 28000 = 12600 Net = -34034.17 + 12600 = -21434.17 (-ve means cash outflow) Model A is better as it is $1737.97 cheaper. time = 4 years

19) College tuition has been rising at a rate of 7% per year. Currently the average tuition of a state college is $9,500/year. Andreas son Trevor will begin college in 12 years. Andreas portfolio is making 5% annually. How much does Andrea need to have set aside today/now to pay for 4 years of college for Trevor? (Note:Tuition will continue

to change annually and Andreas portfolio balance will continu e to accrue interest while Trevor is in school. Also, tuition is due at the beginning of each year.) Sol: PV= 9500, Year1:
FV=9500(1+7/100)12 FV=9500(1.07)12 FV=21395.8

r=7%,

time=12yrs

Year 2:
FV=9500(1+7/100)13 FV=9500(1.07)13 FV=22893.52

Year 3:
FV=9500(1+7/100)14 FV=9500(1.07)14 FV=24496.07

Year4:
FV=9500(1+7/100)15 FV=9500(1.07)15 FV=26210.7 Total fees of 4 yrs can be obtained by adding each years fee= $94996.09 So she needs to have an amount of 94996.09 at the end of 15 yrs.

FV=94996.09, PV=?, rate=5%, time=15yrs

PV=45694.70

20) Work out the computation of the yield in the cumulative scheme of Housing Urban Development Coporation.

SolutionCase 1) considering yield on quarterly basis Considering a sum of Rs 100 for a period of 84 months = 7 years FV= (1+8.50/400)^(4*7) = Rs180.18 Now the yield or rate of return => PTR/100=180.18-100 => R= 80.18x100/(100x7) = 11.45% Hence actual yield = 11.45%

Case 2) considering yield on half yearly basis Considering a sum of Rs 100 for a period of 84 months = 7 years FV= (1+8.50/200)^(2*7) = Rs 179.10 Now the yield or rate of return => PTR/100=179.10-100 => R= 79.10x100/(100x7)

=11.30% Hence actual yield = 11.30% Case 3) consedering yeild on yearlly basis Considering a sum of Rs 100 for a period of 84 months = 7 years FV= (1+8.50/100)^(7) = Rs 177.01 Now the yield or rate of return => PTR/100=177.01-100 => R= 77.01x100/(100x7) = 11.001% Hence actual yield = 11.001% Following the same principle we have formed the table for Cumulative Interest rate for all 7 years and on Yearly, Half Yearly & Quarterly basis .
Period Years 1 2 3 4 5 6 7 (months) 12 24 36 48 60 72 84 Non cumulative scheme Half Yearly Quarterly Yearly 9.00% 9.00% 9.00% 9.10% 9.20% 9.00% 9.00% 8.50% 8.50% 9.10% 9.20% 9.00% 9.00% 8.50% 8.50% 9.10% 9.20% 9.00% 9.00% 8.50% 8.50% Cumulative scheme Half Yearly Quarterly Yearly 9.00% 9.20% 9.31% 9.51% 10.07% 10.29% 10.77% 10.52% 11.00% 9.74% 10.33% 10.55% 11.06% 10.80% 11.30% 9.86% 10.46% 10.69% 11.21% 10.94% 11.45%