MGT201 Assignment Solution (Fall 2011)

Plan A

First plan requires a deposit of Rs 5,000 every six months with annual interest rate of 6.5

percent, compounded semiannually

Answer of part A Future Value = .PMT [((1 + I )n – 1) / i] Future Value = 5000[((1 + .0325)20- 1) / .0325] Future Value = 5000[((1.0325)20 – 1) / .0325] Future Value = 5000[(1.895837924 – 1) / .0325] Future Value = 5000[.895837924 / .0325] Future Value = 5000[27.56424382] Future Value = 137821.2191 Plan B However, under the second plan, he has to deposit Rs 10,000 every year with Interest rate of 7.5 percent compounded annually Answer of Part B Future Value = .PMT [((1 + I )n – 1) / i] Future Value = 10000[((1 + .075)- 1) / .075] Future Value = 10000[((1.075)10 – 1) / .075] Future Value = 10000[(2.061031562– 1) / .075] Future Value = 10000[1.061031562/ .075] Future Value = 10000[14.1470875] Future Value = 141470.875 c). You are required to analyze that which plan would be suitable for him while keeping in view his major concern: ‘The value of plan at the end of 10th year’. Answer of Part C 2nd plan is suitable for him while keeping in view his major concern d). What would be the change in your decision if the interest rate on second plan is also 6.5 percent? Answer of Part D “If interest rate of 2nd plan 6.5 percent then I will chose Plan A because using 6.5 percent interest rate the FV for Plan B will be 134944.22, which is lower than plan A”