Question 1 OR (b)
₹2,40,000 now or ₹7,20,000 after eight years
3 marks
- Time to write
- About 6 minutes
- Topic
- Time value of money
Question
Question 1 OR (b) · 3 marksYou can choose between ₹2,40,000 now and ₹7,20,000 after 8 years, the interest rate being 10%. Which would you choose? What does your preference reveal?
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Which…?What…?Two asks in one question: answer both.
- Which would you chooseEnd with a one-line decision that follows from your figures.
Write it in this order
- 1 Present value of the later sum 1 mark 2 min
- 2 Choice 1 mark 2 min
- 3 What the preference reveals: time value of money, implied rate 1 mark 2 min
Try it first. About 6 minutes for 3 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The two sums fall at different times, so they are compared at the same point of time: the ₹7,20,000 due after 8 years is discounted to its present value at 10%, P = A ÷ (1 + i)ⁿ. The 10%, 8-year factor is 0.467.
| ₹ | |
|---|---|
| Sum receivable after 8 years | 7,20,000 |
| Present value factor, 10%, 8 years | 0.467 |
| Present value of ₹7,20,000 | 3,36,240 |
| Sum receivable now | 2,40,000 |
Choice. The present value of ₹7,20,000 (₹3,36,240) is more than ₹2,40,000, so ₹7,20,000 after 8 years is preferred.
What the preference reveals. It shows the time value of money: a rupee today is not equal to a rupee in eight years, so sums at different dates can be compared only after discounting. Waiting multiplies the money threefold, which is a return of (7,20,000 ÷ 2,40,000)^(1/8) − 1 = 14.72% a year, more than the 10% the money could earn elsewhere. A person who chose ₹2,40,000 now would be revealing a preference for present money (liquidity, certainty) worth more to them than a 14.72% return.
Where the 3 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Present value of the later sum | 1 |
| 2 | Choice | 1 |
| 3 | What the preference reveals: time value of money, implied rate | 1 |
| Total | 3 |
Report a problemopens an email to admin@getkunji.com with the question ID835-Q1ORbalready filled in.