__Retail Banking__

**CAIIB-RETAIL BANKING-LAST MINUTE REVISION-CASE STUDY : 8**Find the amount of required periodic contributions.

Solution:

The future value required to be accumulated equals 50 Crores (50,00,000 × 100)

Since the payments are semi-annual, the periodic interest rate = 5% ÷ 2 = 2.5%

Number of periods = 2 × 15 = 30

Periodic Contribution to Sinking Fund PMT

(FV) = ( FV / (((1+i)^n - 1) / i) )

PMT = Payment per Time Period

FV = Future Value

i = Interest Rate per Time Period

n = Number of Time Periods

= (50,00,00,000 / (((1+0.025)^30 - 1) / 0.025)

= (50,00,00,000 / ((2.097567579 - 1) / 0.025)

= (50,00,00,000 / (1.097567579 / 0.025)

= (50,00,00,000 / 43.90270316)

= 1,13,88,820

So, ABC company must deposit Rs. 1,13,88,820 at the end of each 6 months for 15 years in order to accumulate enough money to pay off the bonds when they are due.

A newly constructed building stands on a plot costing Rs. 100000.

The construction cost of building is Rs. 2000000 and the estimated life of building is 66 years.

The investor wants a 5% return on land cost and 8% return on the construction cost.

Calculate the annual rent to be charged if annual repairs cost 0.5% of cost of construction and other outgoings equal 30% of gross rent.

The co-efficient for sinking fund at 3% for 66 years may be taken as 0.005.

Return on land cost = 5% of 100000 = 5000

Return on construction cost = 6% of 2000000 = 120000

Total Income desired = Rs. 125000

(a) Let gross annual rental be 'r' Outgoings: Annual repairs = 0.5% of 2000000 = 10000

Other outgoings = 30% of r or 0.30 r

Amount towards sinking fund = 0.005 x 2000000 = 10000

Hence, net income = r - 0.30 r - 20000 (b)

Equating (a) and (b), 0.70r - 20000 = 125000

0.70r = 125000 - 20000

0.70r = 105000

r = 105000/0.70

= 12500

Hence, rent per month = Rs. 12500

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