An investment pays Rs. 1,000, Rs. 1,200 and Rs. 1,400 at the ends of years 1, 2 and 3 respectively. At 10% interest, what is its present value?
Correct answer: D. Rs. 2,952.67
- A. Rs. 2,800.00
- B. Rs. 3,600.00
- C. Rs. 3,200.00
- D. Rs. 2,952.67
Explanation
Each payment is discounted according to its payment date: 1,000/1.10 + 1,200/(1.10)^2 + 1,400/(1.10)^3. The sum is approximately Rs. 2,952.67. Adding the payments without discounting gives the misleading figure of Rs. 3,600.
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About Financial Mathematics: Interest, Annuities and Discounting
Financial mathematics covers simple and compound interest, principal, rate, time, accumulated value and present value. It also includes annuities, regular payments, sinking funds, loan repayments and discounting, with a distinction between ordinary annuities and annuities due and between trade discount and mathematical discount.
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