Page 37 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Solution:
ERI = 72 ÷ D = 72 ÷ 8 years = 9 per cent
p
(b) In case of rule of 69

69
ERI = + 0.35
D p
Illustration 22
Take the above example:

69
ERI = + 0.35
8 years
= 8.98 per cent or 9 per cent

2.9 Present Value

Illustration 23
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 3 ⎜ ⎝ + ⎟
1I ⎠
v
⎛ 1 ⎞ 3
= ` 40,000 ⎜ ⎟
+
⎝ (1 0.10)⎠
‹
= ` 40,000 [0.751 ] = ` 30,040

Notes Present value of one rupee table at 3 years for the rate of 10 per cent.
2.9.1 Present Value of a Series of Cash Flows

Illustration 24
From the following information, calculate the present value at 10 per cent interest rate.
Year 0 1 2 3 4 5
Cash inflow (`) 2,000 3,000 4,000 5,000 4,500 5,500

Solution:

2000 3000 4000 5000 4500 5500
P = + + + + +
v 0 1 2 3 4 5
(1 0.10) (1 0.10) (1 0.10) (1 0.10) (1 0.10) (1 0.10)
+
+
+
+
+
+
= 2000 + 2727 + 3304 + 3755 + 3073.5 + 3415.5 = ` 18.275

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