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General Mathematics
Quarter 2 – Module 3
(Week 4)
Fair Market Value, Cash Flow and
Deferred Annuity
i
About the Module
This module was designed and written with you, students, in mind. It is here to help
you master the nature of functions. The scope of this module permits it to be used
in many different learning situations. The language used recognizes the diverse
vocabulary level of students. The lessons are arranged based on the Most Essential
Learning Competencies (MELCs) released by the Department of Education (DepEd)
for this school year 2020 – 2021.
o calculate the fair market value of a cash flow stream that includes an
annuity; and
o calculate the present value and period of deferral of a deferred annuity.
ii
What I Know (Pre-test)
Directions: Choose the letter of the correct answer and write them on a separate
sheet of paper.
2. The _____ of a cash flow (payment stream) on a particular date refers to a single
amount that is equivalent to the value of the payment stream at that date.
A. Exchange Value C. Fair Market Value
B. Future Value D. Present Value
3. It refers to the time between the purchase of an annuity and the start of the
payments for the deferred annuity.
A. Focal Date C. Payment Stream
B. Payment Interval D. Period of Deferral
4. It is a type of annuity that does not begin until a given time interval has passed.
A. Annuity Certain C. Contingent Annuity
B. Annuity Due D. Deferred Annuity
Mr. and Mrs. Reyes received two offers on a lot that they want to sell. Mr.
Ocampo has offered P50,000 and P1 million lump sum payment 5 years from
now. Ms. Cruz has offered P50,000 plus P40,000 every quarter for five years.
Compare the fair market values of the two offers if money can earn 5%
compounded annually.
8. What is the difference between Mr. Ocampo’s offer and Ms. Cruz’s offer?
A. ₱77,953.49 C. ₱76,953.49
B. ₱77,853.49 D. ₱76,853.49
1
9. Which offer has the higher market value?
Unfortunately, May’s phone got broken. She needs a new one immediately so
she decided to buy one using her credit card. She then realized that she can
only start paying after 6 months when her sister could help her in saving for the
house. Thus, she called the bank and requested to start paying after six months.
The bank granted the request with 6% interest converted monthly. If she has to
pay ₱3,000 at the end of each month for 12 months, how much is the present
value of her phone?
13. What is the present value assuming payments are also made during the period
of deferral ( P )?
14. What is the present value of the payments made in the period of deferral ( P’ )?
A. ₱51, 518.30 B. ₱33,829.15 C. ₱17, 689.15 D. ₱10,000.00
2
Lesson Fair Market Value and Cash
9 Flow
”
deferred annuity.
What’s In
☑General Annuity – a type of annuity where the payment interval is not the same
as the interest period. For example, you will pay a loan quarterly with an interest
compounded annually.
☑Simple Annuity – another annuity where the payment interval is the same as
the interest period. For example, depositing a money annually with an interest
compounded annually.
☑Future and Present Value Formula (Simple and General Annuity)
(1 + 𝑗)𝑡 − 1
𝐹=𝑅
𝑗
1 − (1 + 𝑗)−𝑡
𝑃=𝑅
𝑗
where R is the regular payment
j is the interest rate per period, and
t is the number of payments
Source: General Mathematics Teaching Guide, 2016
3
What’s New
What are fair market value and cash flow? What should I know?
☑Cash Flow – a term that refers to payments received (cash inflows) or payments
or deposits made (cash outflows). Cash inflows can be represented by positive
numbers and cash outflows can be represented by negative numbers.
☑Fair Market Value (Economic Value) – of a cash flow (payment stream) on a
particular date refers to a single amount that is equivalent to the value of the
payment stream at that date. This particular date is called the focal date. For this
lesson, we will choose the focal date at the start of the term or t = 0.
Source: General Mathematics Teaching Guide, 2016
Example:
Mr. and Mrs. Reyes received two offers on a lot that they want to sell. Mr. Ocampo
has offered P50,000 and P1 million lump sum payment 5 years from now. Ms. Cruz
has offered P50,000 plus P40,000 every quarter for five years. Compare the fair
market values of the two offers if money can earn 5% compounded annually. Which
offer has a higher market value?
Solution.
Step 1: State the given
Given:
Mr. Ocampo’s offer Ms. Cruz’s offer
P50,000 down payment P50,000 down payment
P1,000,000 after 5 years P40,000 every quarter for 5 years
Step 2: Illustrate the cash flows of the two offers using time diagrams
Mr. Ocampo’s Offer
(P) (F)
50,000 1,000,000
_______________________________________________________
0 1 2 3 … 20
4
Ms. Cruz’s Offer
(P) (F)
50,000 40,000 40,000 40,000 … 40,000
_______________________________________________________
0 1 2 3 … 20
⇨ (1 + 𝑖)4 = 1.05
4
⇨ 1 + 𝑖 = √1.05
⇨ 1 + 𝑖 = 1.0122 …
⇨ 𝑖 = 1.0122 … − 1 ►transfer 1 from the left side to the right side
then proceed to subtraction
⇨ 𝑖 = 0.0122 …
5
1 − (1 + 0.0122 … )−20
𝑃 = 40,000
0.0122 …
► The value of t = 20 because Ms. Cruz will pay 40,000
every quarter for 5 years. There are 4 quarters every
year, consequently, 20 quarters in 5 years.
1 − (1.0122 … )−20
𝑃 = 40,000
0.0122 …
1 − 0.7835 …
𝑃 = 40,000
0.0122 …
0.2164 …
𝑃 = 40,000
0.0122 …
0.2164 …
𝑃 = 40,000
0.0122 …
𝑃 = 40,000(17.63931701)
𝑃 = ₱705,572.68 (round off to the nearest centavo)
What’s More
Mr. and Mrs. Rodriguez received two offers on a house that they want to sell.
Mr. Ocampo has offered P100,000 and P2 million lump sum payment 5 years from
now. Ms. Cruz has offered P100,000 plus P100,000 every quarter for five years.
Compare the fair market values of the two offers if money can earn 6% compounded
annually. Which offer has a higher market value?
6
What I Need to Remember
“
Phew! That was a long but amazing learning. We made
it! Welcome to Lesson 10! Again, I’m teacher Mathilda.
I will continue to guide you in learning a new lesson
that tackles concepts on deferred annuity. Let’s get
started!
DEFINITION OF TERMS
1. Annuity – a sequence of payments made at equal (fixed) intervals or periods
of time.
2. Annuity immediate or Ordinary annuity – a type of annuity in which
payments are made at the end of each period.
3. Deferred annuity – an annuity that does not begin until a given time interval
has passed.
4. Period of deferral – time between the purchase of an annuity and the start of
the payments for the deferred annuity.
7
5. Present Value of an Ordinary Annuity – given by the following formula.
1 − (1 + 𝑗)−𝑡
𝑃=𝑅
𝑗
where R is the regular payment,
j is the interest rate per period, and
t is the number of payments
Source: General Mathematics Teaching Guide, 2016
What’s New
Example. Unfortunately, May’s phone got broken. She needs a new one immediately
so she decided to buy one using her credit card. She then realized that she can only
start paying after 6 months when her sister could help her in saving for the house.
Thus, she called the bank and requested to start paying after six months. The bank
granted the request with 6% interest converted monthly. If she has to pay ₱3,000 at
the end of each month for 12 months, how much is the present value of her phone?
In the above example, what is the present value if May will start paying at the end of
the 7th month to the end of 18th month?
8
Solution.
Step 1: Illustrate the deferred annuity
Deferred Annuity
P=?
3000 3000 3000 … 3000
______________________________________________
0 1 2 3 4 5 6 7 8 9 … 18
12 months payment
Deferred Annuity (t + k)
P=?
3000 3000 3000 3000 3000 3000 3000 3000 3000 3000 … 3000
______________________________________________
0 1 2 3 4 5 6 7 8 9 … 18
Step 6: Solve for the present value assuming payments are also made
during the period of deferral
1−(1+𝑗)−(𝑡+𝑘)
𝑃=𝑅 𝑗
1−(1+0.005)−(12+6)
𝑃 = 3000 0.005
1−(1.005)−18
𝑃 = 3000 0.005
1−0.9141…
𝑃 = 3000 0.005
9
0.0858…
𝑃 = 3000 0.005
𝑃 = 3000 (17.1727 … )
𝑃 = 51, 518.30 (round off to the nearest centavo)
Step 7: Solve for the P’ of artificial payments or payments made in the
period of deferral
1−(1+𝑗)−𝑘
𝑃′ = 𝑅 𝑗
1−(1+0.005)−6
𝑃′ = 3000 0.005
1−(1.005)−6
𝑃′ = 3000
0.005
1−0.9705…
𝑃′ = 3000 0.005
0.0294…
𝑃′ = 3000 0.005
𝑃′ = 3000 (5.8963 … )
𝑃′ = 17, 689.15 (round off to the nearest centavo)
What’s More
NOW IT’S YOUR TURN!
Directions: Solve the problem. Write your solutions on a separate sheet of paper.
10
What I Need to Remember
There are nine steps to solve problems involving present values of deferred
annuity.
1. Illustrate the deferred annuity
2. State the given
3. Find for the number of conversions per year m
𝑖 12
4. Find the Interest rate per period (j = )
𝑚
5. Assume payments are made during the period of deferral
6. Solve for the present value P assuming payments are also made during
the period of deferral
7. Solve for the P’ of artificial payments or payments made in the period
of deferral
8. Subtract the present values of the two payments: P – P’
9. Give the conclusive statement.
What I Can Do
Directions: Copy and locate the terms in the word search puzzle below.
11
Assessment (Post-test)
Directions: Choose the letter of the correct answer and write them on a separate
sheet of paper.
1. Which of the following is the term that refers to payments received (cash inflows)
or payments or deposits made (cash outflows)?
A. Buy and Sell B. Cash Flow C. Remittance D. Trade
3. It is a type of annuity that does not begin until a given time interval has passed.
A. Annuity Certain C. Deferred Annuity
B. Annuity Due D. Ordinary Annuity
4. What do you call the term that pertains to the cash flow (payment stream) on a
particular date refers to a single amount that is equivalent to the value of the
payment stream at that date?
A. Exchange Value C. Future Value
B. Fair Market Value D. Present Value
5. This term refers to the time between the purchase of an annuity and the start of
the payments for the deferred annuity.
A. Focal Date C. Payment Stream
B. Payment Interval D. Period of Deferral
Mr. and Mrs. Reyes received two offers on a lot that they want to sell. Mr.
Ocampo has offered P40,000 and P1 million lump sum payment 5 years from
now. Ms. Cruz has offered P40,000 plus P45,000 every quarter for five years.
Compare the fair market values of the two offers if money can earn 5%
compounded annually.
A. ₱8,245.23 C. ₱10,243.10
B. ₱9,552.89 D. ₱12,429.68
12
9. Which offer has the higher market value?
13. What is the present value assuming payments are also made during the period
of deferral ( P )?
14. What is the present value of the payments made in the period of deferral ( P’ )?
A. ₱11,792.76 B. ₱11,792.77 C. ₱11,972.66 D. ₱11,976.26
13
14
Lesson 9
What's More
Mr. Ocampo's offer:
P1,667,052.33
Ms. Cruz's offer:
P1,863,931.70
Ms. Cruz is P196,879.36
more than Mr. Ocampo's What I Can Do
offer
Lesson 10
What’s More
For 18 months (t+k)
P25,168.77
For 6 months (k)
P8,768.40
For 12 months
P16,400.37 or
P16,400.38
Answer Key
References
Text Book
Orines, F. B. (2016). Next Century Mathematics 11 General Mathematics. Pheonix
Publishing House Inc. with Fernando B. Orines. pp. 25 – 40.
Websites
Commission of Higher Education - CHED (2017). General Mathematics.
TeachTogether Simple Annuity. Accessed November 11, 2020. Retrieved
from www.ched.gov.ph
Maxonlinemath, n.d. Accessed on November 11, 2020. Retrieved from
http://www.maxonlinemath.com/math12/jdinvx/genann.htm
PDF
Verzosa, Debbie Marie B. et al. (2016). General Mathematics Teaching Guide [PDF
File]. Quezon City, Philippines: Commission on Higher Education. pp 196-
224. Retrieved from https://www.lrmds.gov.ph
Avatars
All avatars used in this module are created originally using the Bitmoji mobile
application. Created on July 15, 2020.
Icons
All icons used in this module is taken from MS Office 365.
Congratulations!
You are now ready for the next module. Always remember the following:
15