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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Present value and accumulated value of cashflow streams

Rohan invests Rs 50,000 in a deposit earning 8% per annum effective. What is the accumulated value at the end of 3 years?

The accumulated value is Rs 62,985.60, found by compounding 50,000 at 8% for three years: 50,000 x 1.08^3 = 50,000 x 1.259712. Simple interest would give only Rs 62,000, which ignores interest earned on earlier interest.

  1. ARs 62,000.00
  2. BRs 62,985.60Correct
  3. CRs 62,985.60 less tax of nil, i.e. Rs 61,985.60
  4. DRs 63,000.00
  5. Rs 62,485.60

Explanation

Accumulated value = 50,000 x 1.08^3. 1.08^2 = 1.1664 and 1.1664 x 1.08 = 1.259712. Multiplying by 50,000 gives 62,985.60. The Rs 62,000 option uses simple interest (24% on 50,000 would give 62,000) and ignores compounding.

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