What is the future value of $100 if interest is compounded annually at

a rate of 7% for two years?

PV 100
r 7%
t 2
FV 114.49
₹ 114.49

What is the present value of INR 114.49 that you are going to get after two
years? The interest rate 7%
FV 114.49
r 7%
t 2
PV 100

If you can sale the house after one year at INR 800,000. Assume interest
rate of 7%. Calculate PV.
FV 800000
r 7%
t 1
PV 747664

If you can sale the house after one year at INR 800,000. Assume interest
rate of 12%. Calculate PV.
FV 800000
r 12%
t 1
PV 714286

If you can sale the house after two year at INR 840,000. You can rent the
house at Rs 30,000 per year. Assume interest rate of 12%.
Calculate PV.
FV 840000
PMT 30000
t 2 Yr

PV1 669643 From selling

PV2 50702 From renting
Tot. PV 720344
What is the present value of $1 billion every year, for eternity, if the
perpetual discount rate is 10%?
FV 1
r 10%
PV 10 Billion

Present Value of Perpetuities if the investment does not start making

money for 3 years?
PV3 10 Billion
PV0 7.51 Billion

If you pay INR 3.59 lakhs a year , paid at the end of each of the next five
years, with no down payment. What is the PV of car? Assume interest rate
of 10%.
C 3.59
t 5
r 10%
PV 13.61 Lk INR
The state lottery advertises a jackpot prize of $365 million, paid in 30 yearly installments
of $12.167 million, at the end of each year. Find the true value (PV) of the lottery prize if
interest rate is 6%.

365 mil is distributed in 30 installment so FV is 0

Now,
t 30 year
C 12.167 mil 365.01
Term end of year
r 6%
PV $ -167.5 mil Ans
So the Present value of that 365 million is actually 167.5 million

If you pay INR 3.59 lakhs a year , paid at the end of each of the next five years, with no
down payment. What is the PV of car? Assume interest rate of 10%.

t 5
C 3.59 Lk INR
r 10%
FV 0
Type 0
PV ₹ -13.61 Lk INR
So the present value of the car is 13.61 lakh INR

Example: Paying off a bank loan, Debt: INR 1000, Interest rate 10%, The bank requires
you to repay the loan evenly over the four years.

r 10%
t 4
PV 1000
EMI ₹ -315.47 for 4 Years

Example: mortgage payments, Debt: INR 5,000,000, Interest rate 12%, The bank
requires you to repay the loan evenly over the 30 years.

r 12%
PV 5,000,000
t 30
EMI ₹ -620,718

Calculate EAR
8% APR, Compounded half yearly
Calculate EAR
8% APR, Compounded half yearly

EAR Yearly 8.16%

EAR Monthly 8.30%
EAR Weekly 8.32%

What is EAR for 24% APR (compounded monthly) on a credit card?

EAR 26.82% for monthly billing

This is effective interest rate annually not monthly

8% “quoted” annual rate. Quoted mortgage rates are based on semi-annual

compounding, 1_What is effective monthly interest rate, 2_If mortgage based on
monthly compounding, what is the effective monthly interest rate

APR 8%
Compunding 4 in year EAR APR
EAR 8.16% 8.16% 8.00%
0.656% -Effective monthly rate Ans (i)

Compunding 12 in year
EAR 8.30%
0.667% -Effective monthly rate Ans (i)
 Home Loan
Principal 5000000
r 6.75%
t 15 Years
PMT ₹ -44,245
Interest Principal EMI
IPMT_1 ₹ -28,125 PPMT_1 ₹ -16,120 ₹ -44,245
IPMT_2 ₹ -28,034 PPMT_2 ₹ -16,211 ₹ -44,245
IPMT_3 ₹ -27,943 PPMT_3 ₹ -16,302 ₹ -44,245
IPMT_4 ₹ -27,851 PPMT_4 ₹ -16,394 ₹ -44,245

CUMPRINC
Returns the cumulative principal paid on a loan between start_period and end_period.
Prn_Paid -5000000

CUMIPMT
Returns the cumulative interest paid on a loan between start_period and end_period.
Int_Paid -2964185
 The Investment Detective
Project Free Cash Flows (in $ Thousands)

Project Number 1 2 3 4 5 6 7

Initial Investment ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)

1 $330 $1,666 $160 280 $2,200 $1,200
2 330 334 200 280 900
3 330 165 350 280 300
4 330 395 280 90
5 330 432 280 70
6 330 440 280
7 330 442 280
8 1,000 444 280
9 446 280
10 448 280
11 450 280
12 451 280
13 451 280
14 452 280
15 10,000 (2,000) 280

Sum of Cash Flow Benefits $3,310 $2,165 $10,000 $3,561 $4,200 $2,200 $2,560
Excess of Cash Flow
Over Initial Investment $1,310 $165 $8,000 $1,561 $2,200 $200 $560
Return Generation 10.00%
Present value of Investment 2073 1915 2394 2228 2130 2000 2165
Net Present value 73 -85 394 228 130 0 165
 8

($2,000)
($350) 0.91
(60) 0.83
60 0.75
350 0.68
700 0.62
1,200 0.56
2,250 0.51
0.47
0.42
0.39
0.35
0.32
0.29
0.26
0.24

$4,150

$2,150

2183
183
Particulars EAR/Yr EAR/Mn
FD 7.00% 7.19% 0.580%
Loan 10.25%
Tax 30%
Tenure (Years) 20
Home Price Appreciation 7%
LTCG Tax 10%
Inflation 5%

Purchase Prics 12500000

Stamp Duty 750000
Registration 125000
Brokerage 125000
Down payment 2500000
Loan Amount 10000000
Loan Tenure (Years) 20
Total Months 240

Buy Alternative (Monthly)

EMI from Loan ₹ -98,164
Opportunity Cost FD ₹ -13,525
Stamp Duty ₹ -4,058
Registration Fee ₹ -676
Brokerage ₹ -676
Property Tax ₹ -833
Society charges ₹ -1,000
Tax Benefit ₹ 8,750
Total Effective EMI ₹ -110,183

Rent Alternative
Monthly Rent ₹ -30,000
Society charges ₹ -1,000
Brokerage Charges ₹ -1,647
Total Effective EMI ₹ -32,647

Incremental EMI (Buy) ₹ -77,536

 No Indexation Payment Table
Home Price Apreciation ₹ 48,371,056 Year Interest Principal IT_Gain
LTCG Tax ₹ 3,587,106 1 ₹ -1,025,000 ₹ -169,702 ₹ 262,500
Incremental Payment ₹ 40,192,961 2 ₹ -1,007,606 ₹ -187,097 ₹ 257,282
Profit/Loss ₹ 4,590,990 3 ₹ -988,428 ₹ -206,274 ₹ 251,528
4 ₹ -967,285 ₹ -227,417 ₹ 245,185
5 ₹ -943,975 ₹ -250,728 ₹ 238,192
6 ₹ -918,275 ₹ -276,427 ₹ 230,483
7 ₹ -889,941 ₹ -304,761 ₹ 221,982
8 ₹ -858,703 ₹ -335,999 ₹ 212,611
9 ₹ -824,263 ₹ -370,439 ₹ 202,279
10 ₹ -786,293 ₹ -408,409 ₹ 190,888
11 ₹ -744,432 ₹ -450,271 ₹ 178,329
12 ₹ -698,279 ₹ -496,423 ₹ 164,484
13 ₹ -647,395 ₹ -547,307 ₹ 149,219
14 ₹ -591,296 ₹ -603,406 ₹ 132,389
15 ₹ -529,447 ₹ -665,255 ₹ 113,834
16 ₹ -461,259 ₹ -733,444 ₹ 93,378
17 ₹ -386,081 ₹ -808,622 ₹ 70,824
18 ₹ -303,197 ₹ -891,505 ₹ 45,959
19 ₹ -211,818 ₹ -982,885 ₹ 18,545
20 ₹ -111,072 ₹ -1,083,630 ₹ -11,678
Total ₹ -13,894,046 ₹ -10,000,000 ₹ 3,268,214
Not Required
Home Price ₹ 48,371,056
Anticipated CG ₹ 35,871,056
LTCG Tax ₹ -3,587,106
Opportunity Cost FD ₹ -9,674,211
Stamp+Reg+Brokerage ₹ -3,869,684
Property Tax ₹ -409,955
Society charges ₹ -40,995
Total Interest ₹ -13,894,046
Effective after Tax ₹ -19,522,224
Tax Benefit ₹ 3,268,214
Profit of Selling ₹ 16,029,940
FV of Saved Rent ₹ 16,923,328
Total Gain from House ₹ 32,953,268
 Retirement Planning
Current Age 30 Years
Retirement 60 Years 30
Expected Life 90 Years 30

Target Expense ₹ 100,000 Rs/Mn

Inflation Rate 5%
FV at 60 age ₹ 432,194 Required Rs/Mn at retirement

Now,
Monthly Income ₹ 432,194 Monthly income needed after retirement
Interest 2% Say FD interest expected at my age of 60
PV ₹ 116,929,510 This amount will be need at my 60years age to get 4.32Lk income monthly

Now,
Interest Rate 12% From MF
Tax 10% Tax on Equity Based MF
PMT Target ₹ 43,547 This much I have to save monthly to get the targeted return

if at retirement
growth 1% at 1% rate I am drawing extra money as its value is decreasing
C1 ₹ 5,186,331 C1 because end of the year
PV60 ₹ 132,713,980
Future value of annuity
Slide 3

What is the future value of 20,000 paid at the end of each of the following 5 years,
assuming investment returns of 8% per year?

C 20000
t 5
r 8%

PV 79854
FV 117332 ₹ -117,332 Ans

What is the present value of $1 billion paid at the end of every year in
perpetuity, assuming a rate of return of 10% and constant growth rate of
4%?
Growing Perpetuity
C1 1 as the end of the year
r 10%
g 4%
PV0= 16.67 Ans

Now say if the current value at the beginning of the year is 1 billion (C0) then,
C0 1
C1 1.04
PV0 17.33

Golf club annual membership fee is INR5,000 for the coming years, but you can make a
single payment of INR12,750 for three years membership. Find the better deal given
payment due at the end of the year and 6% expected annual price increase, discount rate
10%.
Growing Annuity
g 6%
r 10%
C1 5000 as end of the year pay
t 3
PV0 13147
But 12750
Profit 397 Profit for one time payment

g indirectly means at this rate the value of the money is decreasing, g is offsetting the inflation
It is like at every year with increase in salary I am saving more at growth rate g to achive my target saving faster
You invest 100 at a continuously compounded rate of 11% for one year.
Present value of 100 received continuously at annually compounded rate is 18.5%
CONTINOUS COMPOUNDING

PV 100
r 11%
t 1
FV 112 Ans1

r 18.50% APR
EAR 20.32% with continous compounding
PV 492.08

Say, APR 8%
EAR/Yr
m=1 8.00%
m=2 8.16%
m=4 8.24%
m=12 8.30%
m=365 8.33%
m=36500 8.33% continous compounding m- infinity

Post retirement you plan to spend INR 2000,000 year for 20 years. Annual compounded
interest rate is 10%. How much must you save to support this spending. Calculate
continuously compounded rate (9.53%)

C 2000000
t 20
EAR 10% EAR Continous Compounding
APR = r 9.53% Always use ln - log of e base
PV ₹ 17,864,962 So this is present value if continous compounding
 10 11 12
Return 36.65 56.04 84.63
Year 1 2 3
Approx beta 1 Expected Return 23.25% 23.25% 23.25%
Rf 8.33% PV= 29.74 36.89 45.20
Rm 17.00% Cash Flow Return from equity
Is the return 17.00%
But Pes are lendinng from LPs like insurance companies
They charge like this (x-2%)*20%
So PE gets (x-2%)*80%
where x is the actual return the business is making
So x= 23.25% Business have to generate this much return to satisfy there investors
so x= WACC as no debt is there for Surya

No depriciation
No fixed capital investment
No inventory
Free cash flow=Net income

Initial growth calculated 23.25% upto 2014

after 2014 growth rate is 4% this is assumption
 13 14 15 16 17 …....
109.29 141.47
4 5 6 7 8 …..
23.25% 23.25% 4% 4% 4%
47.36 49.74
urn from equity Growing Perpetuity

here investors
A bond has an annual coupon rate of 11.5%, paid annually. If investors demand an
annual return of 7.5%. The face value of the bond is INR 100. The bond is going to
mature in 5 years from now. What is the price of the bond ?
Face Value 100
Coupon Rate 11.50%
Discount Rate 7.50%
Tenure 5 Yr
Cash Flow 11.5 Bond Yearly Return like constant Annuity (Income Scheme type)
PV of Capital 70 Capital Returned
PV of Cash Flow 47
Total PV (Ans) 116.184 This is PV of this bond considering 7.5% discount rate at the market

Calculate YTN 7.5% So in the above calculation Discount Rate is actually Yield to Maturity
Change the value above to calculate its impact on present value of bond
If discount rate is higher than coupon rate then PV of Bond will be lower than its Face Value
ower than its Face Value
1. You invest INR 1000 in a fixed deposit of a Bank. The fixed deposit is for five years, and the bank
quoted rate is 6.5%. Calculate the future value at the end of the 5th year if the quoted rate is,

a. an EAR?
C 1000
t 5
r 6.50%
FV 1370

b. a semi-annual APR?
Effective 6.61% EAR/Yr
FV 1377

c. a quarterly APR
Effective 6.66% EAR/Yr
FV 1380

d. a monthly APR?
Effective 6.70%
FV 1383

2. What is the effective annual interest rate if the quoted rate is 5%, and the compounding interval is,
a. annual?
EAR 5.00% 5.00%

b. monthly?
EAR 5.12% 5.12%

c.weekly?
EAR 5.12% 5.12%

d. continuously?
EAR 5.13%

3. You have taken a loan of INR 100,000 from a bank. You must make level monthly payments for ten
years, 120 payments in all. Calculate Equated Monthly Installment (EMI) if the interest rate is,
a. 8% compounded annually
C 100000
EMI ₹ 1,213

b. 8% compounded semi-annually
EAR 8.16%
Monthly 0.656%
EMI ₹ 1,206

c. 8% compounded quarterly
EAR 8.24%
Monthly 0.662%
EMI ₹ 1,210

d. 8% compounded monthly
EAR 8.30%
Monthly 0.667%
EMI ₹ 1,213

4. You want to purchase a car. You visited two dealers, A and B, and they have offered two different
deals. Dealer A offers to sell you the car for INR 2 Mn but allows you to put down INR 0.2 Mn and
payback INR 1.8 Mn over 36 months (Equated Monthly Installment) at a rate of 8% APR,
compounded monthly. Dealer B offers to sell you the car for INR 1.95 Mn but requires a down
payment of INR 0.4 Mn with repayment of the remaining INR 1.55 Mn
over 36 months at 10% APR, compounded monthly. Which deal would you choose? The current
interest rate for a 36-month is

Dealer A Dealer B
Price 2000000 1950000
DP 200000 400000
Rest 1800000 1550000
Tenure 36 36
APR 8% 10%
EAR 8.30% 10.47%
EAR/Mn 0.67% 0.83%
EMI ₹ 56,405 ₹ 50,014

a) b) c) d)
APR% 9.00% 9.33% 9.34% 10.00%
EAR/Yr 9.38% 9.74% 9.75% 10.47%
EAR/Mn 0.75% 0.78% 0.78% 0.83%
FV of OC Delear A ₹ 261,729 ₹ 264,313 ₹ 264,392 ₹ 269,636
FV of OC Delear B ₹ 523,458 ₹ 528,626 ₹ 528,784 ₹ 539,273
FV of EMI Delear A ₹ 2,321,238 ₹ 2,332,873 ₹ 2,333,226 ₹ 2,356,723
FV of EMI Delear B ₹ 2,058,218 ₹ 2,068,534 ₹ 2,068,848 ₹ 2,089,682
Total Cost Delear A ₹ 2,582,967 ₹ 2,597,186 ₹ 2,597,618 ₹ 2,626,359
Total Cost Delear B ₹ 2,581,676 ₹ 2,597,161 ₹ 2,597,632 ₹ 2,628,955
Choose Dealer B B A A Ans
Delta ₹ 1,291 ₹ 25 ₹ -13 ₹ -2,595
5. What is the present value of an annuity of 22 annual payments of INR 5,000? The annually
compounded discount rate is 6.5%
(a) Installments to be paid at the end of the year.
C 5000
t 22 year
r 6.50%
PV ₹ 57,676
PV_End ₹ 57,676

(b) Installments to be paid at the beginning of the year.

PV_Start ₹ 61,425

(c) The first payment arrives in 6 months. Subsequent payments arrive at one-year intervals, at 18
months, 30 months, etc.

Year 22
Month 264

6 ₹ 29,439
18
30
42
54
66
78
90
102
114
126
138
150
162
174
186
198
210
222
234
246
258
264

6. A bond has an annual coupon rate of 7.25%, paid semiannually. The face value of the bond
is INR 100. The bond is going to mature 5 years from now. What is the price of the bond
if investors demand
a. A semi-annual return of 3.32%
Coupon Rate 7.25% Annual Paid 2/Yr
Face Value 100
Tenure 5 Yr
Discount Rate 3.32% Semi_anul
Cash Flow 3.63 /6 Month
PV_1 72.14
PV_2 30.42
PV Total of Bond 102.56

b. An annual return of 6.65%

Return/6 Month 3.27% Assuming that 6.65% is in EAR (effective)
PV_1 72.48
PV_2 30.50
PV Total of Bond 102.97

c. A quarterly return of 2%
Return/6 Month 4.04%
PV_1 67.30
PV_2 29.34
PV Total of Bond 96.64
 Gordon Growth Model
ABC Ltd. pays a dividend of INR 1 per share. An analyst forecasts growth of
4% in perpetuity thereafter. The required return is 12%. Calculate the
current value pe share.

D0 1
g 4%
r 12%
D1 1.04
Value/Share Current 13.0

Two-stage Dividend Discount Model

ABC Ltd. pays a dividend of INR 1 per share. An analyst forecasts growth of
10% for the next three years, followed by 4% growth in perpetuity
thereafter. The required return is 12%. Calculate the current value pe share.

Calc for 10% return,

C1 1.1
Growing Annuity PV ₹ 2.89 1st Part Ans
FV after 3-years 1.33 =C0 for next part calculation

Calc for 4% return,

FV after 3+1 Year ₹ 1.38 = New C1 for perpetuity
Perpetuity PV ₹ 17.30 at start of year 4

Now coming to today,

Returing at Year 0 ₹ 12.32 2nd Part Ans

Total ₹ 15.21 3rd part Ans

C 432 137 797 Project Number
y 1 2 3 iscount Rate
Initial Investment
Cost of Capital 15% 1
Investment 1200 2
3
-1200 432 132 797 4
NPV -200.50 5
6
Year 1 7
Cash Flow -100 40 140 8
IRR 40% 9
10
11
12
13
14
15

NPV 1 Manual
NPV 2 Excel

IRR
MIRR
XIRR
 1 2 3 4 5 6 7 8
10%
($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)
$330 $1,666 $160 280 $2,200 $1,200 ($350) 0.91 300
330 334 200 280 900 (60) 0.83 272.7273
330 165 350 280 300 60 0.75 247.9339
330 395 280 90 350 0.68 225.3944
330 432 280 70 700 0.62 204.904
330 440 280 1,200 0.56 186.2764
330 442 280 2,250 0.51 169.3422
1,000 444 280 0.47 466.5074
446 280 0.42
448 280 0.39
450 280 0.35
451 280 0.32
451 280 0.29
452 280 0.26
10,000 (2,000) 280 0.24
2073 1915 2394 2228 2130 2000 2165 2183
₹ 73.1 ₹ -85.5 ₹ 393.9 ₹ 228.2 ₹ 129.7 ₹ 0.0 ₹ 165.0 ₹ 183.0
₹ 73.1 ₹ -85.5 ₹ 7,090.9 ₹ 228.2 ₹ 129.7 ₹ 0.0 ₹ 165.0 ₹ 183.0

10.9% 6.3% 400.0% 12.3% 11.1% 10.0% 15.3% 11.4%

10.5% 8.4% 400.0% 10.6% 10.5% 10.0% 11.8% 11.2%
Cost of buying the land and constructing building is INR 700,000. you can
sale the house after one year at INR 800,000 (assume risk free interest
rate of 7%)
Investment 700000
PV of Return 747664
NPV 47664 Ans

Cost of buying the land and constructing building is INR 700,000. you can
sale the house after two year at INR 840,000. You can rent the house at
Rs 30,000 per year (assume interest rate of 12%)
Investment 700000
t 2 yr
PV of,
Sell Return 669643
Rent Return 50702
Total 720344
NPV 20344 Ans

A project produces a cash flow of INR 432 in year 1, INR 137 in year 2, and
INR 797 in year 3. If the cost of capital is 15%. If the project requires an
investment of INR 1200, what is the NPV
Year Return PV
1 432 376
2 137 104
3 797 524
Total PV 1003
Investment -1200
r 15%
NPV -197
by Excel ₹ -197

An investment costs INR 1,548 and pays INR 138 in perpetuity. If interest
rate is 9% what is NPV

Investment -1548
Return PV 1533
NPV -15