I am studying a course on Financial Management as a part of our third term here at IIM Lucknow. In that, we get acquainted to concepts like present value, discount rates, cash flows etc. I just thought about applying these principles to an educational loan.
Below, I make a comparison of paying out now v taking an educational loan.
Assume that you have taken an educational of Rs 2,00,000 on 1st Jan 2009. The interest on educational loan is calculated assuming simple interest till the course gets over and after that the interest is compounded. Lets us assume that the course gets over in March 2010. So, the interest accrued at the end of March 2010 is Rs 25,000 (S.I @ 10% for 15 months). From April 2010, the principal and interest = Rs. 225000 has to be repaid in EMI. Suppose, if the tenure of repayment is 5 years, the EMI (compounded monthly) comes to be Rs 4780.59
As per the existing Income Tax rules in India, the interest on educational loan is tax exempted. Taking that into account, the present value of cash outflows from our hand is Rs 184862.6. If it has to be paid out now, one has to pay Rs 200000. This means, one saves a little over Rs 15000 as on today’s value by taking an educational loan of Rs 200000
I have made a simple model of the same in google spreadsheet.
Views, comments and criticisms are invited.
Monday, January 26, 2009
Saturday, January 17, 2009
Thursday, January 08, 2009
Play Safe
FBI to let India prosecute Mumbai attackers
This is a clear strategy of playing safe and escapism by U. S. It does not want to take the issue head-on with Pakistan. So, it says, "It is a major tragedy for you. So, you take charge of the situation. I will provide you support." It is to be read as "This is your problem, you do whatever you want and we do not want to get our hands dirty on this." Pakistan will interpret the statement as, "U. S. has come out of the issue. Now the deal is only between Pak and India", which is what U. S. also wants to tell to them.
This is a clear strategy of playing safe and escapism by U. S. It does not want to take the issue head-on with Pakistan. So, it says, "It is a major tragedy for you. So, you take charge of the situation. I will provide you support." It is to be read as "This is your problem, you do whatever you want and we do not want to get our hands dirty on this." Pakistan will interpret the statement as, "U. S. has come out of the issue. Now the deal is only between Pak and India", which is what U. S. also wants to tell to them.
Dead Cat Bounce
Thought of blogging about some interesting or new words and phrases that I encounter.
I heard of this term "dead cat bounce" from John Authers' Short View on 8th Jan 2008. The actual phrase used is "Even a dead cat will bounce if it is dropped from a great height".
Seems like this phrase is commonly used in market's parlance when some stock or index temporarily rise in the course of its fall. There are examples given by John Authers and he fears rise now could be a deadcat bounce.
One typical example in the recent period would be Satyam's stock decline.
I heard of this term "dead cat bounce" from John Authers' Short View on 8th Jan 2008. The actual phrase used is "Even a dead cat will bounce if it is dropped from a great height".
Seems like this phrase is commonly used in market's parlance when some stock or index temporarily rise in the course of its fall. There are examples given by John Authers and he fears rise now could be a deadcat bounce.
One typical example in the recent period would be Satyam's stock decline.
Satyam - Troubled Story
It is so unfortunate to see a company which commanded high stature till a few weeks ago to go down. It is not a single day aberration, but a series of accounting fraud committed over years which have come to public, just because there is no more opportunities to hide them now. This is clearly evident from Raju’s letter. It is a classic case of broken-window concept.
The fact that is both surprising and shocking is that this fraud has been continued for years now without the notice of the audit firm, PwC and the independent directors. With that being said, either the (un)ethics or the incompetency of these parties would have been the accomplice. Or, Mr. Raju is very clever to keep both of them blind. How can a company survive for years with imaginary cash balance? There are two scenarios here. 1. The cash were not generated at the first place or 2. The cash which got generated suddenly disappeared. With media highly speculating on Raju’s obsession with the real estate, scenario 2 above cannot be eliminated. In fact, the authors in one of the livemint’s columns say that one should take Raju’s letter with a pinch of salt. And, we know the truth only when the results of the investigations are out. Till then, Wait and Watch.
The fact that is both surprising and shocking is that this fraud has been continued for years now without the notice of the audit firm, PwC and the independent directors. With that being said, either the (un)ethics or the incompetency of these parties would have been the accomplice. Or, Mr. Raju is very clever to keep both of them blind. How can a company survive for years with imaginary cash balance? There are two scenarios here. 1. The cash were not generated at the first place or 2. The cash which got generated suddenly disappeared. With media highly speculating on Raju’s obsession with the real estate, scenario 2 above cannot be eliminated. In fact, the authors in one of the livemint’s columns say that one should take Raju’s letter with a pinch of salt. And, we know the truth only when the results of the investigations are out. Till then, Wait and Watch.
Friday, January 02, 2009
Bad Debts
This is rather an interesting imagination, but there is a possibility. In the past, I had irritating experiences with some telecom providers and banks during closing of accounts. One of my friends has also shared a similar experience. Even after giving the request for disconnection, the connection or the account has not been closed. In the case of a mobile phone service, the monthly rental and the late charges have been charged every month for a connection which is supposed to have been closed months earlier as per the request.
There might be some customers like me who are bothered about this and keep pestering the company regarding the closing of the account. But, I believe not everyone does so. Once they give instruction they are not further bothered.
I thought this was a sheer lack in the customer service but during one of our discussions, my friend Karthikeyan and I figured out there could be a hidden agenda behind this whole story.
The situation goes like this. The company keeps charging rentals and late charges for a definite period and subsequently closes the account writing off the amount accrued on the same. As per the records, they have provided “service” to a customer who defaults on his payments forcing the company to close the account and write-off the balance on his account. In reality, there is no service provided at all and no loss made by the company.
In curiosity, I just had a look at the annual report of one of the major telecom providers. It had written off an approximate amount of about Rs 2 billion in the FY 2008-09. Well, there could be some real instances where people used up the services and defaulted creating bad debts to be written off. But one cannot eliminate the possibility of intentionally creating bad debts and writing off the same.
Assume that about 10% (some random percentage, as I do not have any basis to come with a closer guess) of the bad debts are created in this fashion which is Rs 200 million. This reduces the taxable income of the company by that amount. For ease of calculation, assume that the income tax is charged at 30%. Let us have a look into what each party gains or losses.
Company: Tax on Rs 200 million = Rs 60 million saved for the company, but has to pay the service tax (say 12%) on Rs 200 million = Rs 24 million. Therefore, a net gain of Rs 36 million.
Government: A tax of Rs 60 million lost, but gains a service tax (say 12%) on Rs 200 million = Rs24 million. Therefore, a net loss of Rs 36 million.
Customers: Lending their names unknowingly in evading the income tax.
There might be some customers like me who are bothered about this and keep pestering the company regarding the closing of the account. But, I believe not everyone does so. Once they give instruction they are not further bothered.
I thought this was a sheer lack in the customer service but during one of our discussions, my friend Karthikeyan and I figured out there could be a hidden agenda behind this whole story.
The situation goes like this. The company keeps charging rentals and late charges for a definite period and subsequently closes the account writing off the amount accrued on the same. As per the records, they have provided “service” to a customer who defaults on his payments forcing the company to close the account and write-off the balance on his account. In reality, there is no service provided at all and no loss made by the company.
In curiosity, I just had a look at the annual report of one of the major telecom providers. It had written off an approximate amount of about Rs 2 billion in the FY 2008-09. Well, there could be some real instances where people used up the services and defaulted creating bad debts to be written off. But one cannot eliminate the possibility of intentionally creating bad debts and writing off the same.
Assume that about 10% (some random percentage, as I do not have any basis to come with a closer guess) of the bad debts are created in this fashion which is Rs 200 million. This reduces the taxable income of the company by that amount. For ease of calculation, assume that the income tax is charged at 30%. Let us have a look into what each party gains or losses.
Company: Tax on Rs 200 million = Rs 60 million saved for the company, but has to pay the service tax (say 12%) on Rs 200 million = Rs 24 million. Therefore, a net gain of Rs 36 million.
Government: A tax of Rs 60 million lost, but gains a service tax (say 12%) on Rs 200 million = Rs24 million. Therefore, a net loss of Rs 36 million.
Customers: Lending their names unknowingly in evading the income tax.
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