Vinod Gupta SP-19

Case Study
Question No. 3
 Question No. 3
• Vinod has an Existing Unit Linked Pension Plan
• It has 15 Years Premium Paying Term
• Vesting Age is 55 Years
• The premium payable is Rs 36000 pa
• The current balance in the plan is Rs 200000
• The returns during accumulation period= 10%pa
• On the date of vesting he has the option to
purchase an annuity plan from the same
company.
• This is an annuity due certain.
• It would pay an annuity of Rs 11500 pm for 15
years
 Question No 3
• Mr Vinod is interested to change over to an
annuity with return of purchase price plan.

• If the annuity remains Rs 11500 pm for 15 years

with return of purchase price, what should be the
premium to be paid for this annuity starting from
1st Dec 2009 ?

• Assume the insurance company is providing the

same returns as provided by earlier plan.
 Solution 3
• Step 1
• Find the Purchase Price of the 1st Annuity
• Set = Begin
• N = 15
• I = 10%
• PV = 0
• PMT = - 36000
• FV = ?
This amount is used for purchasing
• FV = 1258190 the annuity
 Solution 3
• Step 2
• Find the inherent interest rate offered by the
annuity plan
• Set = Begin
• N = 15 x 12 = 180
• PV = -1258190
• FV = 0
• PMT = 11500
• I=?
• I = 0.61414 % per month
 Solution 3
• We will use the same interest rate for the
proposed Return of Purchase Price Annuity
also….

• We only know that the annuity required is Rs

11500…. Per month …. But we do not know the
purchase price to paid…. for the return of
purchase price annuity…

• So we have to assume a notional figure…

• We will assume that Rs 100 is the purchase

price of the annuity and the same is returned
back after 15 years.
 Solution 3
• Step 3
• Find the annuity for a purchase price of Rs Rs 100 for
15 years with return of purchase price
• Set = Begin
• N = 15 x 12 = 180
• I = 0.61414%
• PV = -100
• FV = 100.
• PMT = ?
• PMT = 0.610394972 Annuity for Rs 100 Purchase Price
 Solution 3
• Step 4
• Find the Purchase Price for an annuity of
Rs 11500
• 100 = 0.610394972
• ? = 11500
• = (11500 x 100) / 0.610394972
• = 1884026 Purchase Price to be paid
 Solution 3
• Step 5
• Find the investment required to create the corpus
• Age of Vinod = 44
• Vesting Age = 55
• So Number of Years available = 11
• Set = Begin
• N = 11
• I = 10%
• PV = -200000
• FV = 1884026
• PMT = ?
• PMT = 64432 New Premium
Question No 1
 Question1
• Investment = 2500000
• Franchise Rights = 5 Years
• Franchise to be Taken over after 5 years after
depreciating at a rate of 15% straight line basis.
• Expected Profits
• Year 1 = 350000
• Year 2 = 474000
• Year 3 = 517000
• Year 4 = 635000
• Year 5 = 710000
• What is the IRR of the Project ?
 Solution 1
• Time 0 = -2500000
• Time 1 = 350000
• Time 2 = 474000
• Time 3 = 517000
• Time 4 = 635000
• Time 5 = ?
• Time 5 = 710000 + ( 2500000 x .25 )
• Time 5 = 710000 + 625000 = 1335000
• IRR = ?
• IRR = 8.20%
Question 3
 Question 3
• Upfront Payment = Rs 20000 on 01.01.2010
• This is 10% of the total cost
• Balance amount to be paid in 36 EMI’s of
Rs 7500 pm starting 1st Feb 2010
• What is the Effective Rate on the Loan ?
 Solution 3
• Find the Rate on the Loan
• Set = End
• N = 36
• PV = 1800000
• PMT = -7500
• FV = 0
• I=?
• I = 2.38% pm
• Eff Rate = (1.0238)^12 ) – 1 = 32.61%
Question 9