Review Question 

A. OBJECTTVE TYPE AND MULTIPLE CHOICE QUESTIONS

1. State whether each of the following statements is True of False:

(i) Value of money received today is more than the value of the same amount of money received after a certain period.

(ii) Compounding technique of time value of money is also known as discounting technique.

(iii) An annuity is a series of unequal payments.

(iv) Doubling period = 100 + Rate of Interest.

(v) Nominal rate of interest is more than the effective rate of interest in multi-period compounding.

[Ans. (i) True; (ii) False; (iii) False; (iv) False; (v) False].


2. Select the most appropriate Answer: 

(i) Discounting or present value is:

(a) Same as compounding; 

(b) exact opposite of compound or future value;

(c) Slightly different from compounding technique;

(d) none of these.

(ii) Effective rate of interest in case of multiperiod compounding grows :

(a) faster than yearly compounding; 

(b) slower than yearly compounding;

(c) same as yearly compounding.

(iii) Multiple compounding period means 

(a) interest compounded annually;

(b) interest compounded for more than once a year

[Ans: (i) (b); (ii) (a); (ii) (c)]


3. Fill in the Blanks:

(i) Time value of money received today is ______ than the value of money received after a certain period.

(ii) The two techniques for adjusting time value of money are (i) compounding and (ii) _______ techniques.

(iii) The future value at the end of period n (Vn) = V0 (__).

(iv) When the cash flows occur at the end of each period, the annuity is called ________ annuity.

(v) The present value of money to be received on future date will be_______ . 

[Ans: (i) more; (ii) discounting; (iii) (1+i)n; (iv) deferred; (v) less]

B. SHORT ANWER TYPE QUESTION

1. Explain the term Time Value of Money within 2-3 Sentences. 

2. What is time preference for money?

3. Name the techniques of time value of money. 

4. What is the concept of 'time value'?

5. Give any two reasons for the time preference of money?

6. What are the reasons for time preference of money?

7. What do you mean by annuity?

8. What is meant by annuity due?

9. How is doubling period calculated?

10.Explain the concept of time value of money.

C. LONG ANSWER TYPE QUESTION

1. "A rational human being has a time preference for money." What are the reasons for such a preference?

2. "Cash flows of different periods in absolute terms are incomparable." Discuss.

3. Examine the various techniques employed to adjust the time value of money.

4. "The finance manager should take into consideration the time value of money in order to take correct financial decisions." Elucidate.

5. Explain the mechanics of calculating present value of cash flows giving suitable examples.

6. Examine the various techniques employed to adjust the time value of money.

Exercises...

E.x 1. Calculate the future value of ₹ 20,000 invested now for a period of 5 years at a time preference rate of 8 %.  [Ans. ₹ 29,380]

ই. এক্স 1.  5 বছৰৰ বাবে এতিয়া বিনিয়োগ কৰা ₹ 20,000 ভৱিষ্যতমূল্য 8% সময়অগ্ৰাধিকাৰ হাৰত গণনা কৰক।  [উত্তৰ. ২৯,৩৮০

E.x 2. Determine the future value at the end of 5years of the following series of payments at 5% rate of interest:

ই.এক্স 2. নিম্নলিখিত পৰিশোধৰ 5 বছৰৰ শেষত 5% সূতৰ হাৰত ভৱিষ্যতৰ মূল্য নিৰ্ধাৰণ কৰক।

At the end of 1st year = ₹ 1, 000

প্ৰথম বছৰৰ শেষত = ₹ 1, 000

                     2nd year = ₹ 2, 000

                    দ্বিতীয় বৰ্ষ = ₹ 2, 000

                     3rd year = ₹ 3,000

                     তৃতীয় বছৰ = ₹ 3,000

                    4th year = ₹ 4,000

                    চতুৰ্থ বৰ্ষ = ₹ 4,000

                    5th year = ₹ 5,000

                    পঞ্চম বৰ্ষ = ₹ 5,000

[Ans. ₹ 16,041]

Ex. 3. Mr. X deposits ₹ 5,000 at the end of every year for 5 years and the deposit earns a compound interest @ 8％ p.a. Determine how much money he will have at the end of 5 years?

[Ans. ₹ 29,335]

Ex. 4. Calculate the present value of ₹ 10,00,000 to be received after 5 years from now assuming 6％ time preference for money.

Ans. ₹ 7,470

Ex. 5. Calculate the present value of the following cash flows assuming a discount rate of 8%.

Year

Cash Flow

1

₹10,000

2

₹20,000

3

₹10,000

4

₹5,000

[Ans .₹ 38,015]

Ex. 6. Mr. A has to receive ₹ 5,000 per year for 6 years. Calculate the present value of the annuity assuming that he can earn interest on his investment at 12% p.a. [Ans. ₹ 20,555]

Ex. 7. A company needs ₹ 10,00,000 after 5 years from now for replacement of its fixed assets. It has established a Sinking Fund for the purpoes. The investments are to be made at the end of each year. What annual payment must be made to ensure the ensure the needed ₹10,00,000 after 5 years . Assume 10% interest per year on investments. [Ans. ₹ 1,63,800.16]

Ex. 8. Determine the amount of equal payment to be made for a loan of 2,00,000 taken for a period of 4 years at 10% rate of interest. [Ans. 63,091.48

Ex. 9. If you deposit 10,000 today at 12 per cent rate of interest, in how many years will this amount grow to 80,000 ? Work out this problem by using the Rule of 72. Do not use the Compound Factor Tables. [Ans. 18 years

Ex. 10. Mr. Ramesh purchased 100 shares of a company for 10 each on 1-1-1991. Te market value per share on 31.12.2005 is 47.85. What is the compound rate of growth in the value of the shares?
[Ans. 11%]

Ex. 11. An investment company pays 12 per cent rate of interest and compound it quarterly. If 5,000 are deposited initially, how much shall it grow to in 5 years.

[Ans. 9030]

Ex. 12. ₹ A company offers to pay you 5,002 annually for 6 years if you deposit 20,000 today with the company. What interest rate do you earn on the deposit.
[Ans. 13%
Ex. 13. An investment company offers to pay 60,965 at the end of 15 years to investors who ₹ deposit annually 1000. What interest rate is implicit in the offer. ₹

[Ans. 18%

Ex. 14. If you deposit 20,000 today at 12 per cent rate of interest, in how many years will this amount grow to 80,000. Work out this problem by using Rule of 72. Do not use compound Factor Tables. 

[Ans. 12 years]

Ex. 15. Mr. A offers to pay you ₹ 12,000 after 15 years in exchange of ₹1,000 today. What interest rate is implicit in the offer.

[Ans. 18％]

Ex. 16. Mr. Rakesh receives a sun of ₹ 2,00,000 as provident fund on his retirement. He deposits it in a bank which pays 12 per cent interest. If he withdraws annually ₹29,364 how long can he do so?

[Ans. 15 years]

 Ex. 1. At the time of his retirement Mr. X is given a choice between two alternatives ; (i) an annual pension of 10,000 as long as he lives, and (ii) a lump sum payment of 60,000. If Mr. X expects to live for 15 years and rate of interest is 15 per cent, which alternative should he select?

[ Ans. Lump sum, because the present value of 10,000 received for 15 years at 15 percent rate of interest is 58470 which is less than 60,000] 

Ex. 18.    Mr. Rajan is to receive 5,000 after five years from now . His time preference for money is 10 % p.a. Calculate its present value , if the discount factor is 0.621.

[Ans . 3,105] 

Ex . 19 . A 10 , payment annuity of 5,000 will begin 7 years hence . What is the value of this annuity now if the discount rate is 12 %? 

[Ans . 14,315] 

Ex. 20. A person invests 5000 at the end of each year at 10 % rate of interest per year . State what amount he will receive at the end of 4 years .

[Ans. 23,205]

Ex. 21. Mr. X is to receive from Indira Vikas Patra 20,000 after 5 years from now . His time preference for money is 10 % p.a. Calculate its present value if the discount factor is 0.621. 

[Ans. 12,420] 

Ex . 22. X deposits 1,00,000 on retirement in a bank which pays 10 % annual interest . How much can he withdraw annually for a period of 10 years if PVgFA 10 % is 6.145? 

[Ans. 16,273.39]


Type: Nayan Moni Deka