Page 49 - DMGT409Basic Financial Management

Basic Financial Management

Notes Illustration 15: Take the above problem as it is and calculate doubling period.

Solution:
D = 0.35 + 69 / 10 = 7.25 years.
p
Effective Rate of Interest in Case of Doubling Period

Sometimes investors may have doubts as to what is the effective interest rate applicable, if a

financial institute pays double amount at the end of a given number of years.

Effective rate of interest can be defined by using the following formula.
(a) In case of rule of 72
ERI = 72 per cent / Doubling period (D )
p
where,

ERI = Effective rate of interest.
D = Doubling period.
p
Illustration 16: A financial institute has come with an offer to the public, where the institute

pays double the amount invested in the institute by the end of 8 years. Mr. A, who is interested
to make a deposit, wants to know the affective rate of interest that will be given by the institute
Calculate:
Solution:
ERI = 72 ÷ D = 72 ÷ 8 years = 9 per cent
p
(b) In case of rule of 69
69
ERI = + 0.35
p D
Take the above example:
69
ERI = + 0.35
8 years
= 8.98 per cent or 9 per cent

Present Value

Illustration 17: An investor wants to find the present value of ` 40,000, due 3 years. His interest
rate is 10 per cent.
Solution:

⎛ 1 ⎞ 3
P = FV ⎜ ⎟
1 I ⎠
v 3 ⎝ +
⎛ 1 ⎞ 3
= ` 40,000 ⎜ ⎝ (1 0.10)⎠ ⎟
+
= ` 40,000 [0.751] = ` 30,040

Note: Present value of one rupee Table at 3 years for the rate of 10 per cent.

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