Time value of money

Question: Assume that you have 1000 take to invest. Two options available (1) invest at 10%
compounding rate for 1 year, 2 years, 5 years and (2) invest at 10% simple rate for 1 year, 2
years, 5 years. Calculate future value of the two options.

Solution:

Given that,

Investment amount = 1000

Interest rate = 10%

Requirements:

1. Future value at the end of 1 year, 2 years and 5 years using compounding rate
2. Future value at the end of 1 year, 2 years and 5 years using simple rate

For compounding rate

FV= Investment amount x (1+ Interest rate)year

FV1= 1000 x (1+ 0.10)1 = 1000 x (1.10)1 = 1000x 1.10 =1100

FV2= 1000 x (1+ 0.10)2 = 1000 x (1.10)2 =1000x 1.21 =1210

FV5= 1000 x (1+ 0.10)5 = 1000 x (1.10)5 =1000x 1.61051 =1610.51

For Simple rate

FV= Investment amount + (Investment amount x interest rate x year)

FV1= 1000 + (1000 x .10 x 1) = 1000 + 100 = 1100

FV2= 1000 + (1000 x .10 x 2) = 1000 + 200 = 1200

FV5= 1000 + (1000 x .10 x 5) = 1000 + 500 = 1500

Question: Assume that you have 1000 take to invest. Two options available (1) invest at 10%
compounding rate for 5 years and (2) invest at 10% simple rate for 5 years. Calculate future
value of the two options.

a. 1500 & 1610.51

b. 1400 & 1610.51

CLASS WORKS_FIM501_SUM20_USA 1
c. 1500 & 1510.51

d. 1600 & 1610.51

Question: Assume that you have 1000 take to invest. Two options available, (1) invest at 10%
compounding rate for 5 years and (2) invest at 10% simple rate for 5 years. Calculate future
value of the two options.

Answer: 1500 & 1610.51

Working capital management (MBA)

Example 04: Calculate the Gross operating cycle and net operating cycle from the data given
below:

Amount (in
No. Particulars
Lakh)
1 Opening balance of
Raw materials, stores and spares 3454.84
Work in process 56.15
Finished goods 637.92
Accounts receivable 756.45
Accounts payable 2504.18
2 Closing balances of
Raw materials, stores and spares 4095.41
Work in process 72.5
Finished goods 1032.74
Accounts receivable 1166.32
Accounts payable 3087.47
3 Purchases of raw materials, stores and spares 10676.1
4 Manufacturing expenses 1146.76
5 Depreciation 247.72
6 Customs and excise duties 35025.56
7 Selling administration and finance (SAF) cost 4557.48
8 Sales 54210.65

Solution:

Gross operating cycle = Raw material storage period (N1) +Conversion Period (N2) + Finished
goods storage period (N3) +Average Collection Period (N4)

CLASS WORKS_FIM501_SUM20_USA 2
Net operating cycle = Raw material storage period (N1)+Conversion Period (N2)+ Finished
goods storage period (N3)+Average Collection Period (N4)- Average Payment period (N5)

Raw material storage period (N1)

= days

.
= days
.

=135.41 days

A. Average daily consumption of raw materials =

.
= = 27.88

Workings:

Annual daily consumption of raw material = opening stock + purchase-closing stock

=3454.84 + 10676.10-4095.41

= 10035.53

B. Average stock of raw materials

. .
= =3775.13

Conversion Period (N2)

.
= days= days=2.02days
.

Average stock of work in progress

. . .
= = =64.33

Average daily cost of production

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=

. . . . . .
= = =31.70

Finished goods storage period (N3)

.
= days = .
days= 5.942 days

Average inventory of finished goods

. . .
= = =835.33

Average daily cost of sales =

( )
=

. . . . .
=

.
= =140.560

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