Skip to content

IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Present value and accumulated value of cashflow streams

An investor pays Rs 1,00,000 now and receives Rs 40,000 at the end of year 1, Rs 50,000 at the end of year 2 and Rs 30,000 at the end of year 3. Using the equation of value, what is the net present value at 5% effective annual interest, to the nearest rupee?

The net present value is the discounted inflows minus the Rs 1,00,000 outlay. Discounting each receipt at 5% gives about Rs 1,09,362, so the NPV is about Rs 9,362 rather than any listed value.

  1. ARs 2,100
  2. BRs 1,240Correct
  3. CRs 1,430
  4. DRs 20,000
  5. Rs 3,310

Explanation

PV of inflows = 40,000/1.05 + 50,000/1.1025 + 30,000/1.157625 = 38,095.24 + 45,351.47 + 25,915.15 = 109,361.86. NPV = 9,362 using these figures. Rechecking the data, 120,000 undiscounted less 100,000 gives 20,000 (no discounting). The closest option must be recalculated: the keyed value does not match, so this item is invalid.

Did you get it right without looking?

One question tells you little. A timed set on Present value and accumulated value of cashflow streams shows your real accuracy, how long you take and where you lose marks.

Practise Present value and accumulated value of cashflow streamsFree diagnostic mock

More Present value and accumulated value of cashflow streams questions