Time Value of Money Practice Questions

Q.1 At an interest rate of 8%, what will be INR10,000 five years from now?

Ans.

FV = INR14,693.28

Q.2 At an interest rate of 8%, What will the today's value of INR10,000 will grow to in five
years?

Ans.

PV = INR6805.83

Q.3 If you wish to accumulate INR140,000 in 13 years, how much must you deposit today in an
account that pays an annual interest rate of 14%?

Ans. INR25,489.71

Q.4 What will INR247,000 grow to be in 9 years if it is invested today in an account with an
annual interest rate of 11%?

Ans. INR631,835.12

Q.5 How many years will it take for INR136,000 to grow to be INR468,000 if it is invested in an
account with an annual interest rate of 8%?
Ans. 16.06 years

Q.6 At what annual interest rate must INR137,000 be invested so that it will grow to be
INR475,000 in 14 years?

Ans. 9.29%

Q.7. If you wish to accumulate INR197,000 in 5 years, how much must you deposit today in an
account that pays a quoted annual interest rate of 13% with semi-annual compounding of
interest?

Ans. INR104,947.03

Q.8. What will INR153,000 grow to be in 13 years if it is invested today in an account with a
quoted annual interest rate of 10% with monthly compounding of interest?
Ans. INR558,386.38

Q.9. How many years will it take for INR197,000 to grow to be INR554,000 if it is invested in an
account with a quoted annual interest rate of 8% with monthly compounding of interest?

Ans. 155.61, 12.97 years

Q.10. At what quoted annual interest rate must INR134,000 be invested so that it will grow to
be INR459,000 in 15 years if interest is compounded weekly?

Ans. 0.157972, Annual rate = 8.21%

Q.11. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of interest. What is your effective annual interest rate?

Ans. 113.65, EAR 13.65%

Q.12 You are offered an annuity that will pay INR24,000 per year for 11 years (the first payment
will occur one year from today). If you feel that the appropriate discount rate is 13%, what is
the annuity worth to you today?

Ans. INR136,486.59

Q. 13 If a woman owns INR10,000 now and invests it at an interest rate of 10%, then she will
have earned INR1,000 by having use of the money for one year. If she were instead not to have
access to that cash for one year, then she would lose the INR1,000 of interest income. What is
the current payout of cash at which the person would be indifferent to receiving cash now or in
one year? In essence, what is the amount that, when invested at 10%, will equal INR10,000 in
one year?

Ans. INR9,090.91

Q.14 ABC International has received an offer to be paid INR100,000 in one year, or INR95,000
now. ABC's cost of capital is 8%.

a) If 8% interest rate is factored into the present value equation what is the present value
factor for this equation?
b) When the present value factor is multiplied by the INR100,000 to be paid in one year, how
much does it equate to pay now?
c) Should ABC accept the immediate payment?

Ans.
a) The Present Value factor is 0.9259
b) It equates to being paid INR92,590 right now.

c) Since the offer of being paid INR95,000 is greater than the present value to ABC of the later
payment, ABC should accept the immediate payment of INR95,000.

Q.15 An investor wants to have INR1 million when she retires in 20 years. If she can earn a 10%
annual return, compounded annually, on her investments, the lump-sum amount she would
need to invest today to reach her goal is closest to what amount?

Ans. INR148,644

Q.16 An individual deposits INR10,000 at the beginning of each of the next 10 years, starting
today, into an account paying 9% interest compounded annually. The amount of money in the
account of the end of 10 years will be closest to what amount?
Ans.

FV annuity factor = 15.19293

FV = INR151,929.

Future value of a lump sum, FV = INR165,603.

Q.17 Suppose that you have earned a cash bonus for an outstanding performance at your job
during the last year.

Your pleased boss gives you 2 options to choose from:

● Option A: Receive INR10,000 bonus now

● Option B: Receive INR10,800 bonus after one year

Further information which you may consider in your decision:

- Inflation rate is 5% per annum.
- Interest rate on bank deposits is 12% per annum.

Which option would you choose?

Ans. Both present and future value analysis lead to the same conclusion (i.e. Option A is
preferable over Option B). This is because both methods are a mirror image of the other.

Q.18 If you deposit INR16,000 per year for 12 years (each deposit is made at the end of each
year) in an account that pays an annual interest rate of 14%, what will your account be worth at
the end of 12 years?
Ans. INR436,331.98

Q.19 You plan to borrow INR389,000 now and repay it in 25 equal annual installments
(payments will be made at the end of each year). If the annual interest rate is 14%, how much
will your annual payments be?

Ans. INR56,598.88

Q.20 You are told that if you invest INR11,000 per year for 23 years (all payments made at the
end of each year) you will have accumulated INR366,000 at the end of the period. What annual
rate of return is the investment offering?

Ans. 3.21%

Q.21 You are offered an annuity that will pay INR17,000 per year for 7 years (the first payment
will be made today). If you feel that the appropriate discount rate is 11%, what is the annuity
worth to you today?

Ans. INR88,919.14

Q.22 If you deposit INR15,000 per year for 9 years (each deposit is made at the beginning of
each year) in an account that pays an annual interest rate of 8%, what will your account be
worth at the end of 9 years?

Ans. INR202,298.44

Q.23You plan to accumulate INR450,000 over a period of 12 years by making equal annual
deposits in an account that pays an annual interest rate of 9% (assume all payments will occur
at the beginning of each year). What amount must you deposit each year to reach your goal?

Ans. INR20,497.98

Q.24 You are told that if you invest INR11,100 per year for 19 years (all payments made at the
beginning of each year) you will have accumulated INR375,000 at the end of the period. What
annual rate of return is the investment offering?

Ans. 5.48%

Q.25 You plan to buy a car that has a total "drive-out" cost of INR25,700. You will make a down
payment of INR3,598. The remainder of the car’s cost will be financed over a period of 5 years.
You will repay the loan by making equal monthly payments. Your quoted annual interest rate is
8% with monthly compounding of interest. (The first payment will be due one month after the
purchase date.) What will your monthly payment be?
Ans. INR448.15

Q.26 You are considering leasing a car. You notice an ad that says you can lease the car you
want for INR477.00 per month. The lease term is 60 months with the first payment due at
inception of the lease. You must also make an additional down payment of INR2,370. The ad
also says that the residual value of the vehicle is INR20,430. After much research, you have
concluded that you could buy the car for a total "drive-out" price of INR33,800. What is the
quoted annual interest rate you will pay with the lease?

Ans. 1.122834%, Annual rate 13.47%

Q.27 You are valuing an investment that will pay you INR12,000 the first year, INR14,000 the
second year, INR17,000 the third year, INR19,000 the four the year, INR23,000 the fifth year,
and INR29,000 the sixth year (all payments are at the end of each year). What it the value of
the investment to you now if the appropriate annual discount rate is 11.00%?

Ans. NPV = INR76,273.63

Q.28 You are valuing an investment that will pay you INR27,000 per year for the first ten years,
INR35,000 per year for the next ten years, and INR48,000 per year the following ten years (all
payments are at the end of each year). If the appropriate annual discount rate is 9.00%, what
is the value of the investment to you today?

Ans. NPV = INR323,123.0

Q.29 John and Peggy recently bought a house. They financed the house with a INR125,000, 30-
year mortgage with a nominal interest rate of 7 percent. Mortgage payments are made at the
end of each month. What total dollar amount of their mortgage payments during the first three
years will go towards repayment of principal?

Ans.

PV = 125000, INR831.6281
PMT = 831.6281
PV = INR120,908.70
Principal repaid = INR4,091.30
Interest paid = INR25,847.31
Q.30 You are valuing an investment that will pay you INR26,000 per year for the first 9 years,
INR34,000 per year for the next 11 years, and INR47,000 per year the following 14 years (all
payments are at the end of each year). Another similar risk investment alternative is an account
with a quoted annual interest rate of 9.00% with monthly compounding of interest. What is the
value in today's dollars of the set of cash flows you have been offered?

Ans. 109.3807, EAR = 9.3807%, NPV = INR314,517.85

Q.31 You have just won the Georgia Lottery with a jackpot of INR40,000,000. Your winnings will
be paid to you in 26 equal annual installments with the first payment made immediately. If you
feel the appropriate annual discount rate is 8%, what is the present value of the stream of
payments you will receive?

Ans. INR17,961,194.14

Q.32 You have just won the Georgia Lottery with a jackpot of INR11,000,000. Your winnings will
be paid to you in 26 equal annual installments with the first payment made immediately. If you
had the money now, you could invest it in an account with a quoted annual interest rate of 9%
with monthly compounding of interest. What is the present value of the stream of payments
you will receive?

Ans. 109.3807, EAR = 9.3807%, PV = 4,453,789.97

Q.33. You are planning for retirement 34 years from now. You plan to invest INR4,200 per year
for the first 7 years, INR6,900 per year for the next 11 years, and INR14,500 per year for the
following 16 years (assume all cash flows occur at the end of each year). If you believe you will
earn an effective annual rate of return of 9.7%, what will your retirement investment be worth
34 years from now?

Ans.

NPV = INR66,239.9844

FV = INR1,542,217.26

Q.34 You plan to retire 33 years from now. You expect that you will live 27 years after retiring.
You want to have enough money upon reaching retirement age to withdraw INR180,000 from
the account at the beginning of each year you expect to live, and yet still have INR2,500,000
left in the account at the time of your expected death (60 years from now). You plan to
accumulate the retirement fund by making equal annual deposits at the end of each year for
the next 33 years. You expect that you will be able to earn 12% per year on your deposits.
However, you only expect to earn 6% per year on your investment after you retire since you will
choose to place the money in less risky investments. What equal annual deposits must you
make each year to reach your retirement goal?

Ans.

You must solve this problem in two steps. First, calculate the PV at the time of retirement of
the amount needed to give you the annuity and remaining sum wanted. Second, calculate the
payment necessary each year over the period from now until retirement to generate the goal.

PV INR3,038,989.79
FV = 3038989.79
PMT= INR8,874.79

Q.35 Deryl wishes to save money to provide for his retirement. Beginning one year from now,
he will begin depositing the same fixed amount each year for the next 30 years into a
retirement savings account. Starting one year after making his final deposit, he will withdraw
INR100,000 annually for each of the following 25 years (i.e. he will make 25 withdrawals in all).
Assume that the retirement fund earns 12% annually over both the period that he is depositing
money and the period he makes withdrawals. In order for Deryl to have sufficient funds in his
account to fund his retirement, how much should he deposit annually (rounded to the nearest
dollar)?

Ans. INR3,250