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Sample Problem 1: Pam wishes to find the present value of P1,700 that
she will receive 8 years from now. Pam’s opportunity cost is 8%. Hint: You
should find the present value to be P918.46
Future Value of a Single Amount (FV of 1)
Future Value Factor Computation
Ordinary Calculator Scientific Calculator
Enter 1+r (1+r)^n
Press multiplication sign twice
Press equal sign for number of
periods minus 1
Sample Problem 2.1: If Fred Moreno places P100 in a savings account
paying 8% interest compounded annually, how much will he have at the
end of year 2? Hint: P108 future value for year 1 and P116.64 for year 2.
Sample Problem 2.2: Jane Farber places P800 in a savings account paying 6% interest
compounded annually. She wants to know how much money will be in the account at the end of 5
years. Hint: The future value of Jane’s savings is P1,070.58.
Present Value of a Ordinary Annuity(PV of OA)
Present Value Factor Computation
Ordinary Calculator Scientific Calculator
Enter 1+r 1-(1+r)^-n
Press division sign twice r
Minus 1
Divide it by rate
Sample Problem 3: Braden Company, a small producer of plastic toys, wants to determine the
most it should pay to purchase a particular ordinary annuity. The annuity consists of P700 at the
end of each year for 5 years. The firm requires the annuity to provide a minimum return of 8%. Hint:
The present value should be P2,794.90
Future Value of Ordinary Annuity (FV of OA)
Future Value Factor Computation
Ordinary Calculator Scientific Calculator
Enter 1+r (1+r)^n-1
Press multiplication sign twice r
Press equal sign for number of
periods minus 1
Divide it by rate
Sample Problem 4: Fran Abrams wishes to determine how much money she will have
at the end of 5 years if she chooses annuity A, the ordinary annuity. She will deposit
P1,000 annually, at the end of each of the next 5 years, into a savings account paying
7% annual interest. Hint: The future value of the ordinary annuity equals P5,750.74.
Present Value of Annuity Due(PV of Annuity in Advance)
Present Value Factor Computation
Ordinary Calculator Scientific Calculator
Enter 1+r 1-(1+r)^-n
Press division sign twice r
Sample Problem 5: In sample problem 3 of Braden Company, we found the present value of Braden’s P700, 5-
year ordinary annuity discounted at 8% to be P2,794.90. If we now assume that Braden’s P700 annual cash flow
occurs at the start of each year and is thereby an annuity due, what is its present value? Hint: You will find the
annuity in advance to be P3,018.49.
Future Value of Annuity Due (FV of Annuity in Advance)
Future Value Factor Computation
Ordinary Calculator Scientific Calculator
Enter 1+r (1+r)^n-1
r
Press multiplication sign twice
Press equal sign for number of periods *(1+r)
Minus 1
Divide it by rate
Minus 1
Sample Problem 6: Fran Abrams wishes to determine how much money she will have at the end of 5 years if she chooses annuity
B, the annuity due. She will deposit P1,000 annually, at the beginning of each of the next 5 years, into a savings account paying 7%
annual interest. Hint: The future value of the annuity due equals P6,153.29.
Perpetuities
Perpetuity is an annuity with an infinite life, in
other words an annuity that never stops
providing its holder with a cash flow at the end
of each year.
PV of a perpetuity= PMT
I
Sample Problem 7: A preferred stock was bought in a company that pays a fixed dividend of P2,500 each year
the company is in business. If the company goes on indefinitely, the preferred stock can be valued as perpetuity.
The company has a 10% interest rate.
Hint: PV of perpetuity= P25,000.
Mixed stream
Sample Problem 8: What is the PV of a 5-year
ordinary annuity of P1,000 plus an additional
P5,000 at the end of year 5 if the interest rate
is 6%? Answer: P7948.65
Mixed stream
Sample Problem 9: What is the PV of the
following uneven cash flow stream: P1,000 in
Year 1, P2,000 in Year 2, P0 in Year 3, and
P4,000 in Year 4 if the interest rate is 8%?
Answer: P5,580.72
Compounding Periods
Annual compounding is the arithmetic process of
determining the final value of cash flow or series
of cash flows when interest is added once a year.
(Same computation as future value of 1)
1 2 3 4 5
Year Beg. Amount Payment Interest Principal (2-3) End. Balance
(%*1) (1-4)
1 P6,000 P1,892.82 P600 P1,292.82 P4,707.18
2 4,707.18 1,892.82 470.72 1,422.10 3,285.08
3 3,285.08 1,892.82 328.51 1,564.31 1,721.77
4 1,720.77 1,892.82 172.08 1,720.74 ---