Practice Questions Set 1
Theme: Time Value of Money
Q1. Calculate the present value of Rs 600/-:
(a) Received one year from now
(b) Received at the end of five years
(c) Received at the end of fifteen years
Assume interest rate of 5% per annum.
Q2. Assuming a 10% discount rate, compute the present value of Rs 1100, Rs 900, Rs 1500 and Rs 700
received at the end of one through four years.
Q3. Exactly ten years from now, Sri Chand will start receiving a pension of Rs 3000/- a year. The
payment will continue for 16 years. How much is the pension worth now if Sri Chand’s interest rate is
10 percent?
Q4. The cost of a new automobile is Rs 3,00,000/-. If the interest rate is 5%, how much would you have
to set aside now to provide this sum in five years?
Q5. You have to pay Rs 6,00,000 a year in school fees at the end of each of the next six years. If the
interest rate is 8%, how much do you need to set aside today to cover these bills?
Q6. You have just graduated and need money to buy a new car. Your rich uncle Henry will lend you
the money as long as you agree to pay him back within four years, and you offer to pay him the rate
of interest that he would otherwise get by putting his money in a savings account. Based on your
earnings and living expenses, you think you will be able to pay $5000 in one year and then $8000 each
year for the next three years. If Uncle Henry would otherwise earn 6% per year on his savings, how
much can you borrow from him?
Q7. Ellen is 35 years old, and she has decided it is time to plan seriously for her retirement. At the end
of each year until she is 65, she will save $10000 in a retirement account. If the account earns 10% per
year, how much will Ellen have in her account at the age of 65?
Q8. What is the present value of $1000 paid at the end of each of the next 100 years if the interest
rate is 7% per year?
Q9. You work for a pharmaceutical company that has developed a new drug. The patent on the drug
will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this
amount will grow at a rate of 5% per year for the next 17 years. Once the patent expires, other
pharmaceutical companies will be able to produce the same drug and competition will likely drive the
profits to zero. What is the present value of the new drug if the interest rate is 10% per annum?
Q10. The interest rate is 10%.
(a) What is the PV of an asset that pays Rs 1 a year in perpetuity?
(b) The value of an asset that appreciates at 10% per annum approximately doubles in seven
years. What is the approximate PV of an asset that pays Rs 1 a year in perpetuity beginning in
year 8?
(c) What is the approximate PV of an asset that pays Rs 1 a year for each of the next seven years?
(d) A piece of land produces an income that grows by 5% per annum. If the first year’s income is
Rs 10000/-, what is the value of the land?
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