Page 57 - DMGT409Basic Financial Management

Basic Financial Management

Notes 11. Cost of capital interest rate requires rate of return and discounting rate factor, all are used
for calculating of PV of cash fl ows.
12. Compound growth rate formula is V (1 + r) = V .
n
o
13. A series of unequal cash flows are called Annuity.

14. 0.35 + 69/I is the formula used to calculate present value of perpetuity.
15. Cash flows are divided with interest (per cent) rate to calculate future value of perpetuity.

3.9 Review Questions

1. Mr. X deposited ` 1,00,000 in a savings bank account today, at 5 per cent simple interest for
a period of 5 years. What is his accumulated interest?

2. Mr. X invested ` 40,000 today, for a period of 5 years. Calculate the future value if his
required rate of returns is 10 per cent.

3. Suppose you deposit ` 1,00,000 with an investment company, which pays 10 per cent
interest with semi annual compounding. What is the total deposit amount at the end of 5
years?
4. Mr. A deposits at the end of each year ` 2000, ` 3000, ` 4000, ` 5000 and ` 6000 for the
consequent 5 years respectively. He wants to know his series of deposits value at the end
of 5 years with 6 per cent rate of compound interest.

5. Assume you have been depositing each year for 5 years, the deposit amount of ` 100, `
200, ` 300, ` 400 and ` 500 respectively. Calculate your deposits value if you get 7 per cent
compound interest and assume you have deposited in the beginning of each year.
6. If you invest ` 500 today, at a compound interest of 9 per cent, what will be its future value
after 60 years?
7. Explain the meaning and importance of valuation concept. How does valuation concept
help in decision making?
8. Explain the rule of 69. How does it compare with the rule of 72?
9. “A bird in hand is more preferable than two birds in the bush”. Explain.

10. A borrower offers 16 per cent rate of interest with quarterly compounding. Determine the
effective rate of income.
11. A finance company has advertised saying that, it will pay a lumpsum of ` 44,650 at the end

of 5 years to anyone who deposits ` 6000 per annum. Mr. A is interested, but he wants to
know the implicit rate of interest.
12. What is the present value of ` 1,00,000, which is receivable after 60 years. If the investor
required rate of interest is 10 per cent.

Answers: Self Assessment

1. n 2. Annually
3. Equal 4. Amortization
5. Rate of interest 6. True
7. True 8. True

9. True 10. False

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