Financial Management Solutions for Time Valus of Money

Chapter 6

TIME VALUE OF MONEY

6.1        Value five years hence of a deposit of Rs.1,000 at various interest rates is as follows:

        r        =        8%        FV5        =        1000 x FVIF (8%, 5 years)

                                        =        1000 x 1.469        =        Rs.1469

        r        =        10%        FV5        =        1000 x FVIF (10%, 5 years)

                                        =        1000 x 1.611        =        Rs.1611

        r        =        12%        FV5        =        1000 x FVIF (12%, 5 years)

                                        =        1000 x 1.762        =        Rs.1762

        r        =        15%        FV5        =        1000 x FVIF (15%, 5 years)

                                        =        1000 x 2.011        =        Rs.2011

6.2.        Rs.160,000 / Rs. 5,000  = 32        = 25

        According to the Rule of 72 at 12 percent interest rate doubling takes place         approximately in 72 / 12 =  6 years

        So Rs.5000 will grow to Rs.160,000 in approximately 5 x 6 years         =  30 years        

6.3.        In 12 years Rs.1000 grows to Rs.8000 or 8 times. This is 23 times the initial deposit.  Hence

            doubling takes place        in 12 / 3 = 4 years.

        According to the Rule of 69, the doubling period is:

        0.35 + 69 / Interest rate

        Equating this to 4 and solving for interest rate, we get

        Interest rate = 18.9%.

6.4        Saving Rs.2000 a year for 5 years and Rs.3000 a year for 10 years thereafter is equivalent to saving Rs.2000 a year for 15 years and Rs.1000 a year for the years 6 through 15.