CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Meera is promised Rs 13,310 three years from now. If the discount rate is 10% per annum compounded annually, what is the present value of this sum?
The present value is Rs 10,000. Discounting Rs 13,310 for three years at 10% means dividing by 1.10 cubed, which is 1.331. Since 13,310 divided by 1.331 equals 10,000, that sum today grows to exactly the promised amount.
- ARs 10,000Correct
- BRs 9,317
- CRs 10,648
- DRs 9,000
Explanation
PV = 13,310 / (1.10)^3 = 13,310 / 1.331 = Rs 10,000. Rs 9,317 results from subtracting 30% (simple discounting, 13,310 x 0.70). Rs 10,648 divides by only 1.10^2... actually it is 13,310 x 0.8, which is a wrong factor.
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