CA Foundation · Quantitative Aptitude · Mathematics of Finance
Anita wants ₹2,00,000 after 3 years. If she can earn 12% per annum compounded annually, which expression gives the amount she must invest today as a single lump sum?
She should invest 2,00,000 divided by (1.12) cubed. Present value under annual compounding equals the target future value divided by one plus the rate raised to the number of years. Multiplying would overstate the sum, and simple-interest discounting ignores compounding.
- A2,00,000 x (1.12)^3
- B2,00,000 / (1.12)^3Correct
- C2,00,000 / (1 + 0.12 x 3)
- D2,00,000 x (0.88)^3
Explanation
Present value under compound interest is FV divided by (1+i)^n, so 2,00,000/(1.12)^3. Multiplying by (1.12)^3 gives a future value, not a present value. Dividing by (1 + 0.36) uses simple interest, which is wrong for compounding.
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