From the Desk of Imran Omer

THE MECHANICS OF VALUATION

Time Value Money
Future Value of Single Amount
1. If you invest Rs. 5,000 today at a compound interest rate of 9% annually, what will be its
future value after 75 years?
2. Mr. Mohsin has invested Rs.25,000 at 6% compounded semi-annually. What amount would
he receive after the expiry of 4 years?
Present Value of Single Amount
3. What is the present value of Rs. 1,000,000 receivable 60 years from now, if the discount rate
is 10%?
4. If an investment pays 9% compounded monthly, how much should you deposit now in order
to have Rs.5000 4 years from now?
Future Value of an Ordinary Annuity
5. What amount will accumulate if we deposit $5,000 at the end of each year for the next 5
years? Assume an interest of 6% compounded annually.
6. Suppose you open an account into which you deposit Rs.200 semi-annually for 10 years. If
the account pays 13% compounded semi-annually, how much will be in the account at the
end of the 10 year period?
Present Value of an Ordinary Annuity
7. If you invest $1,000 at the end of every year for five years and receive a return of 7%, how
much is this worth in today's dollars?
8. If you invest $1,000 a year for twenty (20) years at a return rate of 6% per year, what is the
Present Value of the annuity?
Future Value of an Annuity Due
9. What amount will accumulate if we deposit $5,000 at the beginning of each year for the next
5 years? Assume an interest of 6% compounded annually.
10. You deposit $13,000 at the beginning of every year for 10 years. If interest is being paid at
8%, how much will you have in 10 years?
Present Value of an Annuity Due
11. If you invest $1,000 at the beginning of every year for five years and receive a return of 7%,
how much is this worth in today's dollars?
12. If you invest $1,000 a year for twenty (20) years at a return rate of 6% per year, what is the
Present Value of the annuity if payments are made at the beginning of the year?
Effective Rate (Effective Yield)
13. Find out the effective rate of interest equivalent to the nominal rate of 8% compounded
quarterly.
14. Find the effective rates of interest equivalent to nominal rates
a. 8% compounded semi-annually.
b. 12% compounded monthly.
Present Value of Perpetuity
15. If a person would receive $10,000 in perpetuity and the interest rate is 10%, what would be
the present value?
16. What is the value of $100 perpetuity if interest is 7%?

Problems Chapter – 2 & 8

2-1) If you deposit Rs.100 in the bank today and it earns interest at a rate of 8% compounded
annually, how much will be in the account 50 years from today?

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2-2) On your birthday, your uncle gave you the money in his savings account. His only
deposit was Rs.100 made 50 years ago. The savings account paid 8% compounded
annually. How much money is in the account today?
2-3) A loaf of bread costs Rs.0.79 today. If its price increases by 6% per year, how much will
an equivalent loaf cost in 20 years?
2-5) How much money must you deposit in a savings account today to have Rs.20,000 in 20
years if the interest rate is 8% compounded annually?
2-6) A stock has paid dividends regularly for the last 20 years, starting with Rs.0.75 in 1964
and rising to Rs.4 in 1984. If these dividends have been growing at a constant rate, what
has that rate been for the last 20 years?
2-7) Your sister borrows Rs.1,000 and promises to repay Rs.2,000. If you want at least a 5%
return on your loan, within how many years must she pay you back?
2-8) Which would you prefer: Rs.1,000 now, Rs.2,000 in 5 years, or Rs.3,000 in 10 years if
your time value of money is 12%?
2-9) Which would you prefer: Rs.3,000 now, Rs.2,000 that was placed in a savings account 5
years ago, or Rs.1,000 that was placed in a savings account 10 years ago if
(a) your time value of money is 12%.
(b) your time value of money is 16%.
(c) your time value of money is 8%.
2-13) How much must you save at the end of each of the next 10 years to have Rs.100,000 at
the end of the 10th year if the interest rate is 10%?

2-14) If the discount rate is 12%, what is the present value of Rs.200 received at the end of
each of the next 10 years except for the fourth year (i.e., you get payments at the end of
years 1,2, 3, 5, 6, 7, 8, 9, and 10)?
2-15) If the discount rate is 14%, what is FV10 of Rs.300 received at the end of each of the next
10 years except for the fourth year?

2-19) What is FV10 of a 10-year annuity due with payments of Rs.1,000 if the discount rate is
10%?
2-20) How much must you deposit at the end of each year for 15 years to be able to withdraw
Rs.500 at the end of 10 years and Rs.1,000 at the end of 15 years if your savings draw
interest at an annual rate of 7%?

Practice Questions
1. What would an investment of Rs.3,000 at 6% compounded quarterly would amount to in 5
years?

2. How much would you have to put in the bank today at 5% to accumulate $1,000 by next
year?

3. For how many years Mr. Malik should keep Rs.4,000 invested so as to accumulate to the
amount of Rs.5,375.66 at 6% compounded annually?
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4. On a saving bank account Bank-A pays 6% interest compounded annually, while Bank-B
pays 6% interest compounded semi-annually. On a deposit of Rs.1,000, how much more
interest will be earned in 2 years at Bank-B as compared to Bank-A?

5. Find the interest earned on Rs.7,500 invested at 3.8% compounded monthly for 4 years.

6. Rs.10000 is invested at annual compound interest. After 4 years, the investment has become
Rs.11,608.86. What annual rate of compound interest was used?

7. If Rs.2500 is invested at 7.2% compounded quarterly, what is the amount after 3 years?

8. Suppose you have just been given a bonus of Rs.5000 and you have the opportunity to invest
it at 9% compounded monthly. How many years will it take at this rate for the investment to
grow to Rs.8000?

9. If you deposit $45,000 into an account earning 4% interest compounded quarterly, how
much would you have in 5 years?

10. The future value of an investment is Rs.10,110.28. If money was originally invested at 3.5%
compounded semi-annually for 5 years, what was the amount of the original investment?

11. What is the accumulated value of a $25 payment to be made each of the next three years if
the prevailing rate of interest is 9% compounded annually?

12. What amount must you invest today at 6% compounded annually so that you can withdraw
$5,000 at the end of each year for the next 5 years?

13. If you put $100 in the market at the beginning of every year for 20 years at 10%, how much
would you end up with?

14. A company is considering an investment in a new piece of equipment that costs Rs 60,000
whose economic life is only 5 years. The investment is expected to yield the following after
tax cash inflows at the end of each year:
Year Cash inflow (Rupees)
1 20,000
2 25,000
3 22,000
4 24,000
5 20,000
a. What would be the net present value of the investment assuming the discount factor as
8%?
b. If the cash inflow after tax each year is Rs.22,000 what would be the present value?

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