CMA Intermediate · Financial Management and Business Data Analytics · Time Value of Money
Ramesh will receive ₹1,33,100 exactly 3 years from today. If his opportunity cost of funds is 10% p.a. compounded annually, what is the present value of this amount?
The present value is ₹1,00,000. Discounting the future sum of ₹1,33,100 for three years at 10% means dividing by 1.10 cubed, which is 1.331. This reverses compounding, so ₹1,00,000 grown at 10% for three years gives exactly ₹1,33,100.
- A₹1,00,000Correct
- B₹1,03,100
- C₹93,170
- D₹1,10,000
Explanation
PV = 1,33,100 / (1.10)^3 = 1,33,100 / 1.331 = ₹1,00,000. Subtracting 3 years of simple 10% (₹33,100 less) gives ₹1,00,000 only by coincidence of data, but discounting by 10% only once gives ₹1,21,000, which is wrong. Option ₹93,170 comes from multiplying by 0.70 instead of discounting.
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