CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest
Mr. Banerjee wants Rs 33,100 at the end of 3 years. He will make equal deposits at the end of each of the 3 years in a fund earning 10% p.a. compound interest. What annual deposit is required? (Use 1.1^3 = 1.331)
The required deposit is Rs 10,000 per year. The future value factor for three year-end deposits at 10% is (1.331 minus 1) divided by 0.10, which is 3.31. Dividing the target Rs 33,100 by 3.31 gives Rs 10,000.
- ARs 10,000Correct
- BRs 11,033
- CRs 9,091
- DRs 3,310
Explanation
The FV factor for an ordinary annuity is (1.331 - 1)/0.10 = 3.31. Deposit = 33,100/3.31 = Rs 10,000. Check: 10,000 x 3.31 = 33,100. Rs 11,033 divides by 3 ignoring interest. Rs 9,091 assumes deposits at the start of each year, and Rs 3,310 is a decimal slip.
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