Evaluation of Atal Pension Yojana using Time Value of Money
Synopsis
Atal Pension Yojana (APY) is a social security scheme introduced by the Prime Minister of India in 2015. This scheme aims to secure unorganised sector employees as they do not have any social security benefit. This scheme ensures the beneficiary gets a monthly pension of Rs. 1,000 to Rs. 5,000 from the age of 60 and the pension continues until his/her death. After the demise of beneficiary, his/her spouse is eligible to get the same pension until his/her expiry. Eventually, the fixed corpus amount is given to the nominee after the demise of both beneficiary and his/her spouse. The beneficiary can enrol in this scheme through bank or post office. The beneficiary has the choice to choose premium on monthly or quarterly or half-yearly basis. The premium amount depends on the entry age and the pension requirement of the beneficiary. The APY contribution chart depicts how much premium should be paid to get the expected pension. The beneficiary should pay the premium from the time of enrolment to till he/she reaches 60 years. The premium amount will be debited from the savings account of the beneficiary routinely. Despite the scheme introduced for unorganised sector employees, it covers all people who are unentitled for pension benefit. Thus, some are looking at this scheme from investment perspective. Four members from a joint family would like to enrol for this scheme. However, they had a confusion about the value of this scheme. Thus, they approached Nimmi, an MBA finance graduate to get clarity on the value of this scheme and impact of entry age on value. Nimmi applied Time Value of Money (TVM) concept to find answer for the queries of family members. Thus, this case addresses the queries of people who views this scheme as an investment opportunity.
Learning Objectives
This case aims to make the students aware of estimating the value of investment schemes. This case requires basic understanding on Time Value of Money as it employs ordinary annuity, delayed annuity and lumpsum calculations. Thus, this will enlighten the students on Time Value of Money. Moreover, this case will make the students understand the significance of discount rate on investment decisions. Generally, the discount rate is an opportunity cost for individual, thus it varies based on the risk-taking ability of individuals. The appropriate discount rate must be used to discount the future cash flows as discount rate determines the value. Hence, this case employs four discount rates to distinguish individuals based on their risk-taking ability. Generally, the social security schemes should not be viewed from investment perspective. However, in the joint family members are looking at this as an investment opportunity.
Case Position
This case can be taught in early stage of MBA. This case is best fit for Corporate Finance or Financial Management course, where Time Value of Money concept is introduced.
Teaching Plan
The students may be given the below assignment questions to find answers. The assignment question enables the students to apply Time Value of Money concept and to understand the significance of discount rate.
Case Analysis
The aim of this case is to inform the students about the treatment of delayed annuity and the significance of opportunity cost as it decides the attractiveness of the investment proposal. The present value arrived from delayed annuity does not mean the present value today, rather it is the present value of delayed period. For instance, this scheme offers a pension from 60 years to 80 years .........
Exhibits
Exhibit (TN)-I: COMPUTATION FOR SAANVI
Exhibit (TN)-II: COMPUTATION FOR AAKASH
Exhibit (TN)-III: COMPUTATION FOR MALA
Exhibit (TN)-IV: COMPUTATION FOR BALA
