CA Foundation · Quantitative Aptitude · Mathematics of Finance
A project will pay Rs 10,000 at the end of each of years 3, 4 and 5 (three payments in all). Taking the discount rate as 10% p.a., the present value today is approximately (given that the present value of Rs 1 per year for 3 years at 10% is 2.4869):
The present value is about Rs 20,552. The three equal payments form an annuity valued at Rs 24,869 at the end of year 2, since the first payment falls at year 3. Discounting that amount back two years at 10% divides it by 1.21.
- ARs 20,552Correct
- BRs 22,608
- CRs 24,869
- DRs 27,355
Explanation
The three-payment annuity has value 10,000 × 2.4869 = Rs 24,869 one year before its first payment, i.e. at the end of year 2. Discount this two years: 24,869 / 1.21 ≈ Rs 20,552. Rs 22,608 discounts only one year, and Rs 24,869 ignores the deferment.
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