Corporate Finance - Section B
Quiz 1 Time: 10
minutes
Name: ______KEY______________ Roll no: _______________
Manoj has just received the good news that he has become the father
of an adorable baby girl. Manoj starts dreaming about what his girl
is going to be when she grows up. He would like her to go to
engineering college, which she would join after 17 years. Currently,
an engineering education costs Rs. 50,000 per year. Education
costs are growing at 8% per annum. The entire cost for the first
year has to be paid at the beginning itself. The costs for the
subsequent years are paid at the beginning of each year and each
year the costs increase by 8%. It takes 4 years to get an
engineering degree.
a. (2 points) What will be the cost of the 1st year of engineering
college?
State your answer here: Rs.__185,000.9___________.
FV = 50,000 (1.08)17 = 50,000 x 3.7 = Rs. 185,000.9
b. (4 points) What is the present value of the 4 years of engineering
education, if opportunity cost is 11%?
State your answer here: Rs. 120,530.83
Cost of tution in year 17 = 185,000.9
Cost of tution in year 18 = 185.000.9(1.08) = 199,800.98
Cost of tution in year 19 = 199,800.98 ( 1.08) = 215,785.05
Cost of tution in year 20 = 215,785.05 ( 1.08) = 233,047.86
PV = 185,000.9/(1.11)17 + 199,800.98/(1.11)18 + 215,785.05/
(1.11)19
+ 233,047.86/(1.11)20
PV = 120,530.83
c. (4 points) Manoj’s current income is Rs. 2,00,000. His income grows
at an annual rate of 8%. He plans to save a fixed proportion of his
income each year for 17 years to accumulate the the amount of
money required for his daughters engineering education. His
savings are invested to earn a stated annual rate of 11%. What
proportion of his income should he save each year?
State your answer here: ___________________
At any time t, his annual income is 200,000(1.08)t
PV of his income at time t = 200,000(1.08)t/(1.11)t = 200,000/(1.028)t
Let Manoj save a proportion y of his income each year. The PV of his
savings is given by the sum of : Sum [200,000y/(1.028)t] for t = 1,2,
…,17
PV of his savings should equal Rs. 120,530.83 since he is saving y for
his daughters education.
120,530.83 = 200,000.y. [1/0.028 – 1/0.028(1.028)17]
Solving fory, y = 120,530.83/(200,000 x 13.38) = 0.045 = 4.5%
QUIZ 1 - A
Corporate Finance - Section B
Quiz 1 Time: 10
minutes
Name: _______________________ Roll no: _______________
Manoj has just received the good news that he has become the father
of an adorable baby girl. Manoj starts dreaming about what his girl
is going to be when she grows up. He would like her to go to
engineering college, which she would join after 17 years. Currently,
an engineering education costs Rs. 50,000 per year. Education
costs are growing at 9% per annum. The entire cost for the first
year has to be paid at the beginning itself. The costs for the
subsequent years are paid at the beginning of each year and each
year the costs increase by 9%. It takes 4 years to get an
engineering degree.
d. (2 points) What will be the cost of the 1st year of engineering
college?
State your answer here: Rs._216,381.67.
e. (4 points) What is the present value of the 4 years of engineering
education, if opportunity cost is 12%?
State your answer here: _Rs. 121,084.04
f. (4 points) Manoj’s current income is Rs. 2,00,000. His income grows
at an annual rate of 9%. He plans to save a fixed proportion of his
income each year for 17 years to accumulate the the amount of
money required for his daughters engineering education. His
savings are invested to earn a stated annual rate of 12%. What
proportion of his income should he save each year?
State your answer here: __4.5%_________________
QUIZ 1 - B
