Page 32 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 2: Time Value of Money

Self Assessment Notes

State True or False:
6. Current consumption is one of the reasons for time preference of money.
7. Compound value and future value both, are same.

8. There are two rules available to find out double period.
9. Effective rate of interest is more than the nominal rate of interest in single period
compounding.

10. Rule 73 is one of the rules of doubling period.
11. Cost of capital interest rate requires rate of return and discounting rate factor, all are used
for calculating of PV of cash flows.

12. Compound growth rate formula is Vo (1 + r) = Vn.
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.

2.6 Practical Implications of Compounding and Discounting Value
Concepts

Illustration 11
Suppose you have ` 10,00,000 today, and you deposit it in a financial institute, which pays you
8 per cent compound interest annually for a period of 5 years. Show how the deposit would
grow.
Solution:
C =P (1 + I) 8
vn o
5
FV = 10,00,000(1+0.08) = 10,00,000 (1.469)
5
FV = ` 14,69,000
5

Notes See the compound value for one rupee Table for 5 years at 8 per cent rate of interest.

2.6.1 Variable Compounding Periods

Illustration 12 (Semi annual compounding)

How much does a deposit of ` 40,000 grow in 10 years at the rate of 6 per cent interest and
compounding is done semi-annually. Determine the amount at the end of 10 years.
Solution:
×
⎛ 0.06 ⎞ 210
⎜
CV = ` 40,000 1 + ⎟
10y ⎝ 2 ⎠
= ` 40,000 [1.806] = ` 72,240

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