IAI Actuarial Core Principles · Business Finance · Key principles of finance
Tara Industries expects to receive Rs 1,10,000 exactly one year from today. The appropriate annual discount rate is 10%. What is the present value of this receipt?
The present value is Rs 1,00,000. A single receipt one year away is discounted by dividing by (1 + rate), so 1,10,000 divided by 1.10 gives 1,00,000. Subtracting 10% of the cash flow would be wrong because the rate applies to the present value.
- ARs 99,000
- BRs 1,00,000Correct
- CRs 1,21,000
- DRs 1,10,000
- Rs 90,909
Explanation
PV = 1,10,000 / 1.10 = Rs 1,00,000. Rs 1,21,000 wrongly compounds the amount forward instead of discounting. Rs 99,000 subtracts 10% of the amount rather than dividing by 1.10.
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