NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Mrs. Iyer wants a scholarship fund that pays Rs 12,000 at the end of every year forever. If the appropriate discount rate is 8% per annum, how much must she invest today?
She must invest Rs 1,50,000. The present value of a perpetuity equals the annual payment divided by the discount rate, so Rs 12,000 divided by 0.08 gives Rs 1,50,000, assuming the first payment is at the end of year one.
- ARs 96,000
- BRs 1,00,000
- CRs 1,50,000Correct
- DRs 1,62,000
Explanation
The present value of a perpetuity is the annual cash flow divided by the rate: 12,000 / 0.08 = Rs 1,50,000. Rs 96,000 comes from multiplying by 8 instead of dividing. Rs 1,62,000 comes from multiplying the correct value by 1.08, which wrongly treats the payment as made at the start of the year.
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