Funding a dated education goal
Series X-A case study · set 1, case 2 of 9 · 5 questions · 1 mark each
Question 1 of 5Case practice
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The case · stays here for all 5 questions
Meera needs ₹6,05,000 exactly two years from today for a course. For this exercise, a deposit earns a guaranteed 10% annually with annual compounding. She can either place one sum today or make equal deposits at the end of year 1 and year 2. Her existing goal account contains ₹4,00,000 today and will earn the same return. There are no taxes, charges or other cash flows. The course cost in two years is fixed at the amount stated, so no further inflation adjustment should be applied. Meera wants to compare funding methods before selecting one. The alternatives must not be added together.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Meera needs ₹6,05,000 exactly two years from today for a course. For this exercise, a deposit earns a guaranteed 10% annually with annual compounding. She can either place one sum today or make equal deposits at the end of year 1 and year 2. Her existing goal account contains ₹4,00,000 today and will earn the same return. There are no taxes, charges or other cash flows. The course cost in two years is fixed at the amount stated, so no further inflation adjustment should be applied. Meera wants to compare funding methods before selecting one. The alternatives must not be added together.
All people, firms, prices and contract terms are fictional.
Ignore taxes and transaction costs unless the case explicitly includes them.
Q1What single deposit today would exactly fund the goal?
Option A. ₹5,00,000 — Correct answer
Option B. ₹5,50,000
Why it is wrong: This discounts for only one year.
Option C. ₹6,05,000
Why it is wrong: This ignores the two years of growth.
Option D. ₹4,84,000
Why it is wrong: This is the future value of the existing account.
Answer: A. ₹6,05,000 ÷ 1.10² = ₹5,00,000. Remember: Present value converts a future requirement into today’s equivalent.
Hint, shown before you answer in practice mode: Discount the target for two annual periods.
XA-S1-C02-Q1easynumerical
Q2What will her existing ₹4,00,000 become in two years?
Option A. ₹4,84,000 — Correct answer
Option B. ₹5,00,000
Why it is wrong: This is the required present value, not the account’s future value.
Option C. ₹4,40,000
Why it is wrong: This compounds for only one year.
Option D. ₹4,80,000
Why it is wrong: This uses simple interest for two years.
Answer: A. ₹4,00,000 × 1.10² = ₹4,84,000. Interest in the second year also earns on the first year’s interest. Remember: Compound growth applies to the accumulated balance.
Hint, shown before you answer in practice mode: Apply two years of compounding to the existing sum.
XA-S1-C02-Q2mediumnumerical
Q3How much must she add today to the existing account for the lump-sum method?
Option A. ₹1,00,000 — Correct answer
Option B. ₹50,000
Why it is wrong: This is only half the required present-value gap.
Option C. ₹2,05,000
Why it is wrong: This subtracts today’s balance from a future amount.
Option D. ₹1,21,000
Why it is wrong: This is the gap measured at the future goal date.
Answer: A. The required present value is ₹5,00,000 and the existing account is ₹4,00,000 today. The top-up is ₹1,00,000. Remember: Do not subtract money values from different dates.
Hint, shown before you answer in practice mode: Compare values at the same date.
XA-S1-C02-Q3mediumnumerical
Q4If she starts from zero instead, what equal year-end deposit funds the full goal?
Option A. ₹5,50,000
Why it is wrong: This treats the plan as one deposit at year 1.
Option B. ₹2,88,095.24 — Correct answer
Option C. ₹2,75,000
Why it is wrong: These deposits grow to only ₹5,77,500.
Option D. ₹3,02,500
Why it is wrong: This ignores interest earned by the first deposit.
Answer: B. For deposit P, P × 1.10 + P = ₹6,05,000. Thus P = ₹6,05,000 ÷ 2.10 = ₹2,88,095.24. Remember: An ordinary annuity has payments at period ends.
Hint, shown before you answer in practice mode: The first deposit grows for one year. The second arrives at the goal date.
XA-S1-C02-Q4hardnumerical
Q5Why would increasing the assumed return reduce the amount required today?
Option A. The investment period would become longer.
Why it is wrong: The goal remains exactly two years away.
Option B. Each rupee deposited today would grow to a larger amount by the same goal date. — Correct answer
Option C. The course cost would automatically fall.
Why it is wrong: The course cost is fixed in the case.
Option D. The existing balance would be counted twice.
Why it is wrong: Existing assets can be counted only once.
Answer: B. Present value equals the fixed target divided by a growth factor. A higher return enlarges that factor, reducing the present amount needed. Remember: Change one planning assumption at a time.
Hint, shown before you answer in practice mode: Hold the goal amount and time fixed.
XA-S1-C02-Q5mediumapplication
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