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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money

Meena wants Rs 10,00,000 at the end of 5 years for her daughter's education. Assuming an annual return of 10% compounded annually, which lumpsum today is closest to what she must invest? (Discount factor at 10% for 5 years = 0.6209)

Meena must invest about Rs 6,20,900 today. The present value of Rs 10,00,000 due in 5 years at 10% compounded annually is found by multiplying by the discount factor 0.6209. Simple-interest shortcuts give wrong, different values.

  1. ARs 6,20,900Correct
  2. BRs 5,00,000
  3. CRs 6,66,667
  4. DRs 7,50,000

Explanation

PV = FV x discount factor = 10,00,000 x 0.6209 = Rs 6,20,900. Rs 5,00,000 wrongly deducts 10% per year as simple discounting over 5 years (10,00,000/2). Rs 6,66,667 uses a 50% total markup, 10,00,000/1.5, which is simple interest.

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