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Calculates following data:na) An investor invested Rs.5000/- for 4 years with interest rate 12% per year. Calculate Future value (using generalised formula).
SolutionThe solution is mentioned below −FVn = PV (1+r) ^nHere, PV = 5000, r =12%, n = 4 yearsFVn = 5000 (1+12%) ^4 FVn = 5000 (1.12) ^4 FVn = Rs. 7867.60/-b) Calculate the deposit after 12 years, if the investor deposited Rs. 80000 with 12% interest rate.FVn = PV (1+r) ^n FVn = 80000 (1+12%) ^12 FVn = 80000 (1.12) ^12 FVn = Rs. 311678.08/-c) An investor invested Rs. 15000 for 3 years with interest 14% compounded quarterly. Calculate Future value.FVn = PV (1+(r/m)) ^m*n FVn = 15000 (1+ (14%/4)) ^4*3 FVn = 15000 (1.035) ^12 FVn = Rs.22666.03/-d) ...
Read MoreExplain compounding technique in the time value of money.
If the interest is compounded, that means the interest which is earned at the end of year, will be added to principal and will go on till the end of time. Future values are calculated by using this compounding interest.As interest rates increases, compounding interest also increases, that means if you want large sum of money, interest rates must be high. So, when investors were investing, they should look for higher interest rate to get high returns in this method.Basic compounding problems includes −Future value of a single sum: compounds single amount to future valueFuture value of a series of ...
Read MoreDifferentiate between fixed interest rates and floating interest rates.
The major differences between fixed interest rate and floating interest rate are as follows −Fixed interest rateInterest rates are high.Financial market conditions will have no effect on these rates.EMIs are fixed.By using these rates, it is possible to plan the budgets.It has sense of security.It is better for short or medium terms.On long term loans, it may have more impact on payments (if, increase in market).Less risk is involved.Floating interest rateInterest rates are low.Financial market conditions have effect on these rates.EMIs are not fixed, they change with interest rates.By using these rates, planning of budget is relatively difficultThese rates will ...
Read MoreCompare simple interest and compound interest.
The major differences between simple interest and compound interest are as follows −Simple interestIt is the percentage interest on total principal amount.Low returns.Principal is constant.Growth of both principal and interest is constant.Interest will be charged only on principal amount.Easy to calculate.Formula: PTR/100.Compound interestIt is the percentage interest charged on principal and accrued interest.High returns compared to simple interest.Both principal and accrued amounts changes because of addition of interest during the period.Principal and interest will grow at pace.Interest will be charged on both principal and interest.Difficult to calculate, when compared to simple interest.Formula = P(1+(r/100))^t – P
Read MoreDifference between compounding and discounting techniques in time value of money.
The major differences between compounding and discounting techniques in time value of money are as follows −Compounding techniqueIt is a process of calculating future value using present investment.It determines money gained by an investment.It is also called as present value.Compound interest rate.Uses future value/compounding factor.Its formula is Fv= Pv(1+r)^nAmount increases in this method.Right side to left (time line).If the rate is low then, future value will decrease and if the rate is high then, future value will increase.Discounting techniqueIt calculates future cash flows using present value.It determines the amount to be invested to get maximum future gains.It is also called ...
Read MoreExplain the concept Time value of money in finance.
Time value of money tells, what would be the worth of value of your present money in future. In other words, it tells about the worth of today’s money in future. Money potential increases with time.If you invest your today’s money, for which you will get interest, it will automatically increase the value of money. Factors like inflation and purchasing power are to be considered, while investing the money because both can erode the value.Time value of money helps investors to take decisions about where to invest, when to invest. It also helps us to understand about interest, inflation, risk ...
Read MorePresent value of money is 2500, which is invested at 10% and time of investment is 2 years. Calculate the future value.
SolutionThe solution is explained below −Future value = to be calculatedPresent value =Rs. 2500/-Interest rate = 10%Time = 2 years Fv = Pv * [1 + (i/n)] ^ (n*t) Fv = 2500 *[1+ (10%/1)] ^ (1*2) Fv = 2500 * [1 + 0.1] ^2 Fv = 2500 * [1.1] ^2 Fv = 2500 * 1.21 Fv = 3025/-
Read MoreHow to calculate net present value using Net present value (NPV)?
Following are cash flow for P1 and P2Year12345Project 1 (P1)40004600580072003500Project (P2)40004800360054003500Year 1Year 2Year 3Year 4Year 50.9250.8920.7490.6710.602Present value Rs.1/- @10% (discounted factor) using present value tableSolutionThe solution is stated below −For Project 1 (P1) −Initial investment = Rs. 35000/- YearDiscounted factorReturnsNet present value10.9254000370020.89246004103.230.74958004344.240.67172004831.250.602350021072510019085.6 Present value = Rs.19085.6/- Return on investment = (25100-19085.6)/35000 => 0.17184 => 17.184% For Project 2 (P2) − Initial investment = Rs. 23000/- YearDiscounted factorReturnsNet present value10.9254000370020.89248004281.630.74936002696.440.67154003623.450.602350021072130016408.4 Present value = Rs.19085.6/- Return on investment = (21300-16408.4)/23000 => 0.21268 => 21.268% Hence, from the above calculations: Return on investments for P2 is more than P1 So, project P2 is selected.
Read MoreUsing accounting, calculate the missing boxes in the table.
Assets (Rs.)Liabilities (Rs.)Owners’ equity (Rs.)5000022000XXX11600XXX560010000055000XXX50000XXX290004500016000XXX41300XXX36500SolutionThe solution is explained below −We know accounting equation => Assets = Liabilities + Owner’s equityAssets (Rs.)=Liabilities (Rs.)+Owners’ equity (Rs.)50000=22000+2800011600=6000+5600100000=55000+4500050000=21000+2900045000=16000+2900041300=4800+36500
Read MoreWhat are steps in calculating financial breakeven point
SolutionThe solution is explained below −We need to calculate preferred dividends, net interest expense before calculating financial breakeven pointPreferred dividends = preferred stock * 6% = 150*6% => $9 millionNet interest expense = total interest expenses – interest income= 150*6% => $9 millionNet interest expense = total interest expenses – interest income= 15 million – 2 million => 13 millionFinancial breakeven = (PD/1-TR)+ NIE= (9/ (1-28%)) + 13= 12.5 + 13= $ 25.5 million(Here, PD = preferred dividends, TR = Tax rate and NIE = Net Interest Expense).
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