OVERVIEW OF BUSINESS MATHEMATICS:

Description 1. Single Cash Flow 2. Multiple Constant Cash Flows 3. Perpetual Cash Flows 4. Complex Cash Flows
(Annuities) (Perpetuities) (Mixed Cash Flows)
PV = FV/ (1+ r)t or PVA= C [{1- 1÷ (1+r)t}÷ r] or
Present PV = C / r Combination of two or more
PVA= C [{1- 1÷ (1+r/m)tm}÷ r/m]
Value (PV) formulas.
PV = FV/ (1+ r/m)tm
Annuity Due:
For example, bond valuation
PVA= C [{1- 1÷ (1+r)t}÷ r] (1+r) or
need to use following two
PVA= C [{1- 1÷ (1+r/m)tm}÷ r/m] (1+r/m)
formulas:
FV = PV (1+ r)t or FVA= C [{(1+r)t – 1} ÷ r] or Not Applicable. PV = FV/ (1+ r)n +
Future FVA= C [{(1+r/m)tm – 1} ÷ r/m] Cash flows will continue PVA= C [{1- 1÷ (1+r)t}÷ r]
Value (FV) forever. Therefore, no FV
FV = PV (1+ r/m)tm
Annuity Due: calculation. Again, for share valuation we
FVA= C [{(1+r)t – 1} ÷ r] (1+r) or
might need to use single/multiple
FVA= C [{(1+r/m)tm – 1} ÷ r/m] (1+r/m)
cash flow(s) formula plus
perpetuity formula (or other
Period (t) t = log (FV/PV) ÷ log (1+r) Use financial calculator / MS Excel to Not Applicable.
combinations).
solve for t. t= ∞.

r = (FV/PV)1/t – 1 or Use interpolation formula to solve for r or

Rate (r) IRR. r = C/PV Notes:
EIR = (1 + r/m)m -1 m = times interest is
RRR=[(1+NRR)÷(1+INF)]-1 Use financial calculator / MS Excel to compounded within a year
solve for IRR. EIR = Effective Interest Rate
C= PVA÷[{1-1÷ (1+r)t}÷ r] or RRR = Real Rate of Return
Payments Not Applicable. C=PVA÷[{1-1÷ (1+r/m)tm}÷ r/m] C= PV * r INF = Inflation Rate
(C) Single cash flow. No cash FVGA = Future Value of
flow(s) in between PV and FV. C= FVA÷[{(1+r)t –1} ÷ r] or Growing Annuities
C= FVA÷[{(1+r/m)tm –1} ÷ r/m] PVGA = Present Value of
2A. Multiple Growing Cash Flows 3A. Perpetual Cash Flows Growing Annuities
Growth (g) (Growing Annuities) with Growth (Growing C1= Cash flow after year1
Perpetuities) g = growth rate
FVGA = C1 [(1+r)t – (1+g)t ]/ (r-g)
PVGA = C1 [1- {(1+g)/(1+r)}t}]/(r-g) PV = C1 / (r–g)
r = (C1 / PV) + g
C1= PV * (r–g)
 CORPORATE FINANCE
TIME VALUE OF MONEY: PRACTICE PROBLEMS

1. You are going to inherit Tk. 50,000,000 after 10 years. At a 10% annual interest rate, what is the value of
your inheritance now?
2. Your target is to have Tk. 2,000,000 as savings after 5 years. XYZ Bank has a savings product which will
give you 7% interest per annum, compounded monthly. How much money you need to deposit in the bank
today in order to achieve your target in five years?
3. How much you will get back after 3 years, if you deposit Tk.100,000 today in a bank at 8% annual interest
rate?
4. For a savings account ABC Bank pays interest 8% per annum, compounded monthly. If you deposit Tk.
100,000 in that account, how much you will get after 5 years?
5. How many years will it take for an investment to grow from Tk. 1,000,000 to grow to Tk. 2,000,000 at 10%
interest per annum?
6. Your investment of Tk. 500,000 grew to Tk. 800,000 in 2 years. What rate of return did you earn on that
investment?
7. Calculate the effective interest rate for an account yielding nominally 12% per annum, compounded
monthly.

8. What is the monthly rate of interest that will yield an annual effective interest rate of 12 percent?
9. If investors receive a 7% interest rate on their bank deposits, what real interest rate will they earn if the
inflation rate over the year is a) 0%? b) 3% and c) 6%

10. How much you have to invest today in order to have Tk. 500,000 at the end of each year for the next 5
years? Assume an interest rate of 12% per annum.

11. How much money you must have today in order to withdraw Tk. 5,000 at the end of each month for next 30
years? Assume an interest rate of 12% p.a., compounded monthly.

12. How much money you must have today in a bank in order to withdraw Tk. 100,000 at the beginning of
each month (starting from today) for next 30 years? Assume an interest rate of 8% per annum,
compounded monthly.

13. You have decided to deposit Tk. 100,000 in a savings account at the end of each year for next 30 years of
your working life. The money can be invested at an interest rate of 8% p.a. How much you will save in 30
years from now?

14. You have decided to save Tk. 5,000 in a savings account at the end of each month for next 30 years. The
money can be invested at an interest rate of 8% a year, compounded monthly. How much you will be able
to save in 30 years?

15. You have decided to save Tk. 5,000 in a savings account at the beginning of each month for next 30 years.
The money can be invested at an interest rate of 10% a year, compounded monthly. How much you will be
able to save in 30 years?

16. In order to have Tk. 10,000,000 after 15 years from now, how much you should save at the end of each
month at 8% interest rate p.a, compounded monthly?

17. You have Tk. 1,000,000 in your bank account. How much you will be able to spend at the end of each year
for next 10 years from that account if the interest rate is 8% p.a?
18. If you take out a Tk. 1,000,000 car loan for five years at an interest of 15% p.a, compounded monthly, how
much you will have to pay at the end of each month as equal monthly installment (EMI)?

19. In order to have Tk. 3,000,000 after 15 years from now, how much you should save at the end of each year
at 8% interest rate p.a?

20. What is the present value of an investment that will give you Tk. 60,000 at the end of each year forever at
12% required return p.a?

21. Steven White is considering taking early retirement, having saved Tk.40,000,000. White desires to
determine how many years the savings will last if Tk.4,000,000 per year is withdrawn at the end of each
year. White feels the savings can earn 10 percent per year.

22. A local bank will pay you Tk.100, 000 a year for your lifetime if you deposit Tk.2, 500,000 in a bank today. If
you plan to live forever, what interest rate is the bank paying?

23. You have deposited Tk. 5,000,000 in savings account that will pay you 6% interest per annum forever. If
you intend to keep that amount in that savings account for the rest of your life, how much interest you will
be able to withdraw per year from that account?

24. Your friend wants you to invest in his business. He told you that he will give you Tk. 100,000 as profit at the
end of the first year. Thereafter, he promises to pay 5% more each year forever. If your required rate of
return is 12% p.a., how much should you pay for this investment opportunity?

25. Ms. Julia Rahman decides to save once per year. Her expected savings will be Tk. 100,000 for the first
year and she expects to save 10% more each year thereafter. In a savings account that has an interest of
6% per year, how much she would be able to save after 5 years.

26. Mr. Arif just offered a job Tk. 360,000 per year. He anticipated that his salary increasing by 8% every year
until his retirement in 35 years. Given an interest rate of 12% per annum, what is the present value of the
job offer?

27. An investment requires an outlay of Tk.1,000,000 today. Cash inflows from the investment are expected to
be Tk.400,000 per year at the end of years 4, 5, 6, 7, and 8. If you require a 20 percent annual rate of
return on this type of investment, should the investment be undertaken?

28. Your mother is planning to retire this year. Her firm has offered her a lump sum retirement payment of
Tk.5,000,000 or a Tk.600,000 lifetime ordinary annuity-whichever she chooses. Your mother is in
reasonably good health and expects to live for at least 15 more years. Which option should she choose,
assuming that an 8 percent annual interest rate is appropriate to evaluate the annuity?

Use MS Excel to calculate the following:

29. A Tk.10,000 car loan has payments of Tk.361.52 due at the end of each month for three years. What is the
nominal interest rate?

30. What annual interest rate would you need in order to have an ordinary annuity of Tk.750,000 per year
accumulate to Tk.27,960,000 in 10 years?