Problem 1

Mr. Vinay plans to send his son for higher studies abroad after 10 years. He expects the cost of these studies to be Rs. 100,000. How much should he save annually to have a sum of Rs. 100,000 at the end of 10 years, if the interest rate is 12 percent?

Problem 2
At the time of his retirement, Mr. Jingo is given a choice between two alternatives: (a) an annual pension of Rs. 10,000 as long as he lives, and (b) a lump sum amount of Rs. 50,000. If Mr. Jingo expects to live for 15 years and the interest rate is 15 percent, which option appears more attractive?

Problem 3 Exactly ten years from now Mr. X will start receiving a pension of Rs.3,000 a year. The payment will continue for sixteen years. How much is the pension worth now, if Xs interest rate is 10 per cent?

Solution:
The present value of pension can be found in two steps. First, find out present value of the 16-year annuity at 10 per cent interest rate at the end of year 9. P9 = Rs3,000 7.824 = Rs 23,472
Then find out present value now of the lump sum of Rs23,472:

P0 = Rs 23,472 0.424 = Rs 9,954

Problem 4 Your father has promised to give you Rs.100,000 in cash on your 25th birthday. Today is your 16th birthday. He wants to know two things: (a) If he decides to make annual payments into a fund after one year, how much will each have to be if the fund pays 8 percent? (b) If he decides to invest a lump sum in the account after one year and let it compound annually, how much will the lump sum be? (c) If in (a) the payments are made in the beginning of the year, how much will be the value of annuity?

Solution: (a) Rs100,000 = A(FVIFA9,0.08) = Rs100,000 = A(12.488) Rs100,000 A Rs8007.69 12.488 (b) Rs100,000 = P(FVIF9,0.08) = Rs100,000 = P(1.999)

Rs100,000 P Rs50,025 1.999

(c) This is a problem of an annuity due since payment is made at the beginning of the year. Rs100,000 =A(FVIFA9,0.08(1.08)) Rs100,000 = A(12.487)

Rs100,000 A Rs7,414.55 13.478

Problem 5 AB Limited is creating a sinking fund to redeem its preference capital of Rs 5 lakh issued on 6 April 2004 and maturing on 5 April 2015. The first annual payment will be made on 6 April 2004. The company will make equal annual payments and expects that the fund will earn 12 percent per year. How much will be the amount of sinking fund payment?

Solution: AB Co. wants to accumulate a future sum of Rs 500,000. Since the annual payments will be made in the beginning of the year, we can use the formula for the

compound value of an annuity due to solve the problem:

A(FVIFAn,i)(1+i) = 500,000 A(FVIFA12,0.12) (1.12) = 500,000 A(24.133) (1.12) = 500,000 27.029A = 500,000 A = 500,000 / 27.029 = Rs 18,498.65