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

Mr. Raghavan wants to endow a scholarship that pays Rs 12,000 at the end of every year forever, with the first payment one year from today. If the appropriate discount rate is 8% per annum, what amount must be set aside today?

Rs 1,50,000 must be set aside. The present value of a perpetuity whose first payment comes one year from now equals the annual payment divided by the discount rate, so 12,000 divided by 0.08 equals Rs 1,50,000.

  1. ARs 96,000
  2. BRs 1,50,000Correct
  3. CRs 1,62,000
  4. DRs 1,38,000

Explanation

The present value of an ordinary perpetuity = cash flow / rate = 12,000 / 0.08 = Rs 1,50,000. Rs 1,62,000 wrongly adds the first payment, as if it were paid today. Rs 96,000 wrongly multiplies by the rate percentage instead of dividing.

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