CA Foundation · Quantitative Aptitude · Mathematics of Finance
Mr. Bhatia is promised a lump sum of ₹1,21,000 exactly 2 years from today. If money earns 10% per annum compounded annually, what is the present value of this promise?
The present value is ₹1,00,000. Discounting ₹1,21,000 for two years at 10% compounded annually means dividing by 1.21, which gives ₹1,00,000. Investing that amount today at 10% would grow to exactly ₹1,21,000 in two years.
- A₹1,00,000Correct
- B₹1,01,000
- C₹96,800
- D₹1,10,000
Explanation
PV = 1,21,000 / (1.10)^2 = 1,21,000 / 1.21 = ₹1,00,000. Check: 1,00,000 x 1.21 = 1,21,000. Option ₹96,800 comes from subtracting 20% simple discount (1,21,000 x 0.80), which wrongly ignores compounding.
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