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CMA Foundation · Fundamentals of Business Mathematics and Statistics · Time Value of Money and Annuity - Simple and Compound Interest

Mr. Sharma will receive Rs 24,200 exactly 2 years from today. If money earns 10% p.a. compounded annually, what is the present value of this amount?

The present value is Rs 20,000. Discounting Rs 24,200 for two years at 10% compound interest means dividing by 1.21, which gives Rs 20,000. Dividing by 1.2 as with simple interest would overstate the present value.

  1. ARs 20,000Correct
  2. BRs 20,167
  3. CRs 19,360
  4. DRs 21,780

Explanation

PV = 24,200 / (1.10)^2 = 24,200 / 1.21 = Rs 20,000. Check: 20,000 x 1.21 = 24,200. Rs 19,360 comes from discounting at simple rate 10% twice by 20% (24,200 x 0.8), which is wrong. Rs 20,167 uses 24,200/1.2 (simple interest).

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