NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Meera wants to accumulate Rs 11,03,000 in 3 years by investing a lump sum today in a fixed deposit that earns 10% per annum compounded annually. Which is the closest amount she must invest today?
She must invest about Rs 8,29,000. The present value is the target of Rs 11,03,000 divided by 1.10 cubed, which is 1.331, giving roughly Rs 8,28,700. Simply subtracting 30% would be wrong because it ignores compounding.
- ARs 8,29,000Correct
- BRs 8,48,000
- CRs 7,72,100
- DRs 8,00,000
Explanation
PV = 11,03,000 / (1.10)^3 = 11,03,000 / 1.331 = about Rs 8,28,700, closest to Rs 8,29,000. Rs 7,72,100 comes from deducting 30% (10% x 3 years) from the target, which is the wrong method. Rs 8,48,000 and Rs 8,00,000 do not reconcile with discounting by 1.331.
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