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CS Executive · Corporate Accounting and Financial Management · Time Value of Money

Rohan is offered Rs 2,42,000 at the end of 2 years. If the discount rate is 10% compounded annually, what is the present value?

The present value is Rs 2,00,000. Discounting for two years with annual compounding means dividing by 1.10 squared, which is 1.21. Using 1.20 as simple interest or discounting for one year only gives wrong values.

  1. ARs 2,00,000Correct
  2. BRs 2,01,667
  3. CRs 2,20,000
  4. DRs 1,93,600

Explanation

PV = 2,42,000 / (1.10)^2 = 2,42,000 / 1.21 = Rs 2,00,000. Check: 2,00,000 x 1.21 = 2,42,000. Rs 2,01,667 wrongly divides by 1.20 (simple interest), and Rs 2,20,000 discounts only one year.

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