A housing property of INR 50 lakh is on sale either through a Full Down Payment (FDP) scheme with an 8% rebate OR a Deferred Payment Plan (DPP) as shown in the table. A customer after converting all the future payments in DPP using 10% annual discount rate, found the DPP scheme to be financially gainful. The customer would be able to save in INR _________ lakh, if DPP is chosen over FDP. (rounded off to two decimal places)

Question

‘Leno' is a reputed car manufacturing company, which is going to complete its 75 years in October 2024. The Chief Executive Officer of the company decided to take the company to a higher level. For this, he called a meeting of all departmental heads of the company. In the meeting, the Chief Executive Officer proposed a target to increase sales by 10 and profits by 20 in its Platinum Jubilee year.
The Human Resource Manager estimated that an increase of 500 workers would be required to achieve the target. The Finance Manager suggested that the company must hold adequate cash balances for various purposes, and he will prepare a statement showing the cash inflows and outflows for this particular period. Identify and explain two types of plans discussed in the above case.

Answer 1

Under the Full Down Payment (FDP) scheme, an immediate payment of INR 50 lakh is required. With an 8% rebate, the net FDP amount is calculated as: \[ \text{Amount paid under FDP} = 50 \, \text{lakh} - 8\% \times 50 \, \text{lakh} = 50 \, \text{lakh} - 4 \, \text{lakh} = 46 \, \text{lakh} \]

The Deferred Payment Plan (DPP) involves payments spread over 3 years. These future payments will be discounted to their present value using a 10% annual discount rate.

Step 1: The booking payment of INR 10 lakh, made immediately, has a present value of: \[ PV_{\text{Booking}} = 10 \, \text{lakh} \]

Step 2: The payment of INR 15 lakh due after 1 year has a present value of: \[ PV_{\text{Year 1}} = \frac{15 \, \text{lakh}}{(1 + 0.10)^1} = \frac{15}{1.1} = 13.64 \, \text{lakh} \]

Step 3: The payment of INR 15 lakh due after 2 years has a present value of: \[ PV_{\text{Year 2}} = \frac{15 \, \text{lakh}}{(1 + 0.10)^2} = \frac{15}{1.21} = 12.40 \, \text{lakh} \]

Step 4: The payment of INR 10 lakh due after 3 years has a present value of: \[ PV_{\text{Year 3}} = \frac{10 \, \text{lakh}}{(1 + 0.10)^3} = \frac{10}{1.331} = 7.52 \, \text{lakh} \]

Step 5: The total present value of the DPP scheme is the sum of all individual present values: \[ PV_{\text{DPP}} = 10 + 13.64 + 12.40 + 7.52 = 43.56 \, \text{lakh} \]

Step 6: The customer's savings by choosing the DPP scheme over the FDP scheme are: \[ \text{Savings} = 46 \, \text{lakh} - 43.56 \, \text{lakh} = 2.44 \, \text{lakh} \]

Conclusion: Opting for the DPP scheme over the FDP scheme results in a customer saving of INR 2.44 lakh.

Show Hint

Solution and Explanation

Top Questions on Financial Planning

Questions Asked in GATE AR exam