MGT 201 (FM) GDB Idea Solution Your father is 50 years old now and his plan is to retire exactly at the age of 60. His goal is to create a fund that will allow him to receive Rs15, 00,000 at the time of retirement so that he can start a small business. He has searched the market and is confused between the two options: ƒ ƒ

Option 1: To deposit Rs.9,000 after every 6 months in banks A Option 2: To deposit Rs.2,000 after every 4 months in banks B

Both banks assume payments at the end of respective months. As a business graduate, you have been asked to help him out as: What interest rate assumption has the Bank A used in its offer? What interest rate assumption has the Bank B used in its offer? Which option is favorable?

Option 1: To deposit Rs.9, 000 after every 6 months in banks A Answer: m*n

FV = PV x (1+i/m) 6*10

FV

= 9000 x (1+0.07 / 6) 60

FV

= 9000 x (1 + 0.01166) 60

FV = 9000 x (1.01166)

FV = 9000 x 2.005609793 FV = 18050.48813

Option 2: To deposit Rs.2, 000 after every 4 months in banks B Answer: m*n

FV = PV x (1+i/m) 4*10

FV

= 2000 x (1+0.07 / 4)

FV

= 2000 x (1 + 0.0175)

FV

= 2000 x (1.0175)

40

40

FV = 2000 x 2.001597343 FV = 4003.194686

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