Page 53 - DMGT409Basic Financial Management

Basic Financial Management

Notes Illustration 23: Mr. Bhat an investor, expects a perpetual amount of ` 1000 annually from his
investment. What is his present value of this perpetuity if the interest rate is 8 per cent?
Solution:

PV = CIF/I = 1000/0.08 = ` 12,500
∝
Loan Amortisation

Loan is an amount raised from outsiders at an interest and repayable at a specifi ed period
(lumpsum) or in installments. The repayment of loan is known as amortisation. A fi nancial
manager may take a loan and he may interested to know the amount of equal instalment to
be paid every year to repay the complete loan amount including interest. Instalment can be
calculated with the following formula:
⎛ I (1 I+ ) ⎞
n
L = P A ⎜ ⎟
I
n
⎝ (1 I+ ) − 1⎠
or
L = P ÷ PVIFA
I A n . I
Where,
L = Loan installment.
I
P = Principal amount.
A
I = Interest rate.
n = Loan repayment period.
PVIFA = PV interest factors at loan repayment period at a specifi ed interest rate.
n . I
Illustration 24: ABC Company took a loan of ` 10,00,000 lakh for an expansion program from
IDBI at 7 per cent interest per year. The amount has to be repaid in 6 equal annual installments.
Calculate the per instalment amount.

Solution:
⎛ 0.06 (1 0.06 ⎞
)
6
+
L = 10,00,000 ⎜ ⎟
)
6
+
I ⎝ (1 0.06 − ⎠
1
or
L = 10,00,000 ÷ PVIFA
I 7%. 6y
= 10,00,000 ÷ 4.769 = ` 2,09,687.56
Present Value of Growing Annuity

Growing annuity means the cash flow that grows at a constant rate for a specified period of time.
In others, the cash flow grows at a component rate.

Steps involved in calculation:
1. Calculate the series of cash fl ows.
2. Convert the series of cash flows into present values at a given discount factor.

3. Add all the present values, of series of cash flows to get total PV of a growing annuity.

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