Time Value of Money
Q1. Mr. Sundaram is planning to retire this year. His company can pay him a lump sum retirement payments of Rs 2, 00,000 or Rs 25,000 life time annuity whichever he chooses. Mr. Sundaram is in good health and estimates to live for at least 20 more years. If his interest rate is 12%, which alternative should he choose? Ans Present Value of Annuity
25000*7.469*1.12 = 2,09,132
Which is greater than lump sum value of Rs. 2,00,000. So Annuity option is better. Q2. Assume that you have given a choice between incurring an immediate outlay of Rs 10,000 and having to pay Rs 2310 a year for 5 years (first payment due one year from now) the discount rate is 11%. What would be your choice? Will your answer change if Rs 2310 is paid in the beginning of each year for 5 years? Ans Option 1: Annuity Deferred: 2310*3.6959 = 8537.5 Option 2: Annuity Due 2310*3.6959 *1.11 = 9477
Both the options are better than paying lumpsum of Rs. 10,000.
Q3. Exactly twenty years from now Mr. Ahmed will start receiving a pension of Rs 10,000 a year. The payment will continue for twenty years. How much is pension worth now, assuming money is worth15% per year? Value at the end of 19th year
10000*PVIFA(20 years,15%) = 62593
62593*PVIF(19years,15%)=62593*.0703 = 4400.
Q4. Mr. Rakesh receives a sum of Rs 2,00,000 as provident fund on his retirement. He deposits it in a bank which pays 12% interest. If he withdraws annually Rs 29,364, how long can he do so? PV=A* PVIFA (12%,n years)
200000=29364(12%, n years)
Ans. 15 Years.
Q5. At the time of his retirement Mr. X is given a choice between two alternatives: (i) an annual pension of Rs 12,000 as long as he lives, and (ii) a lump sum payment of Rs 80,000. If Mr. X expects to live for 15 years and rate of interest is 15 percent, which alternatives should he select? Value of Pension=12000*PVIFA(15%,14years)=12000*(5.7245+1)=80694 Lump sum value=80000
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