KIDAPAWAN CITY DIVISION

KIDAPAWAN CITY NATIONAL HIGH SCHOOL

SENIOR HIGH SCHOOL DEPARTMENT

SIMPLIFIED SELF-LEARNING MODULE IN GENERAL MATHEMATICS

Cash Flow and Deferred Annuity
Quarter 2 Module 4

Name: ___________________________________________ Grade and Section: __________________

School: __________________________________________ LRN: _____________________________
Subject Teacher: __________________________________

I. OBJECTIVES
1. Calculate the fair market value of a cash flow stream that includes an annuity. M11GM-IId-2
2. Calculate the present value and period of deferral of a deferred annuity. M11GM-IId-3

II. SUBJECT MATTER/ TOPIC AND CURRICULUM GUIDE

a. Content Standard: Key Concepts of Simple and General Annuities
b. Performance Standard: Investigate, analyze & solve problems involving simple and general annuities.
c. References: Teaching Guide for SHS Gen Math pp.220-236, Gen Math Learner’s Material pp.188-207

III. PROCEDURE
Cash Flow

A cash flow is 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.

The fair market value or 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
focal date.

Example 1. Mr. Ribaya received two offers on a lot that he wants to sell. Mr. Ocampo has offered P50,000 and
1 million lump sum payment after 5 years. Mr. 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:
Mr. Ocampo’s Offer Mr. Cruz’s Offer
P50,000 down payment P 50,000 down payment
P1,000,000 after 5 years P40,000 every quarter for 5 years

Find: fair market value of each offer

The cash flows of the two offers using time diagram:

Mr. Ocampo’s offer

50,000___________________________________________________1,000,000_
0 1 2 3 … 20

Mr. Cruz’s offer

50,000__ ___ 40,000______ 40,000_____ __40,000______ ...______40,000_

0 1 2 3 … 20

Choose a focal date and determine the FMV of the 2 offers.

Solution #1. The focal date is 𝑡 = 0 (start of the term). Since the focal date is at the beginning of the term,
compute the present value of each offer.

Mr. Ocampo’s offer

Since P50,000 is offered today, then its present value is still P50,000.
The present value of P1,000,000 offered five years from now is:
𝑃 = 𝐹(1 + 𝑗)−𝑛 Note: Formula for finding the present value.
𝑃 = 1,000,000(1 + 0.05)−5
𝑃 = 𝑃 783,526.17
Thus, the Fair Market Value (FMV) = 50,000 + 783.526.17
= Php 833,526.17
SSLM Writers:
Lavin S. Blanco, Jennylee V. Pun-an, Jeasza May Claire J. Porras
Nixon B. Barrete, Nicanor D. Butal, Edmund H. Hernandez
Page 1 of 6 General Mathematics
Grade-11
Mr. Cruz’s offer
Since P50,000 is offered today, then its present value is still P50,000.
Computer for the present value of a general annuity with quarterly payments but with annual
compounding at 5%:

Solve for the equivalent rate: Solve for the present value (annuity):
𝐹1 = 𝐹2
4 1 − (1 + 𝑗)−𝑛
𝑖4 0.05 1 𝑃=𝑅
(1 + 4 ) = (1 + ) 𝑗
1
1 1 −20
4( ) 1 − (1 + 0.0122722344)
𝑖4 4 0.05 1(4) 𝑃 = 40,000
(1 + 4 ) = (1 + ) 0.0122722344
1
1
𝑖4
𝑗= = (1.05) − 1
4 𝑷 = 𝑷 𝟕𝟎𝟓, 𝟓𝟕𝟐. 𝟔𝟖
4
𝒊𝟒
𝒋= = 𝟎. 𝟎𝟏𝟐𝟐𝟕𝟐𝟐𝟑𝟒𝟒
𝟒

Thus, the Fair Market Value (FMV) = (Down Payment) + (Present Value)
= 50,000 + 705,572.68
= Php 755,572.68

Solution #2. The focal date is at 𝑡 = 5 (end of the term). Since the focal date is at the end of the term, compute
the future value of each offer.

Mr. Ocampo’s offer

The future value of P50,000 after the term at 5% compounded annually is:

𝐹 = 𝑃(1 + 𝑗)𝑛
𝐹 = 50,000(1 + 0.05)5
𝐹 = 𝑷𝒉𝒑 𝟔𝟑, 𝟖𝟏𝟒. 𝟎𝟖
At the end of the term, P1,000,000 is valued as such (because this is the value at 𝑡 = 5).

Thus, the Fair Market Value (FMV) = 63,814.08 + 1,000,000

= Php 1,063,814.08

Mr. Cruz’s offer

The future value of P50,000 after the term at 5% compounded annually is:
𝐹 = 𝑃(1 + 𝑗)𝑛 Note: Formula for finding the future value.
𝐹 = 50,000(1 + 0.05)5
𝐹 = 𝑷𝒉𝒑 𝟔𝟑, 𝟖𝟏𝟒. 𝟎𝟖

The future value of P40,000 every quarter for 5 years at 5% compounded annually is:

Solve for the equivalent rate: Solve for the future value (annuity):
𝐹1 = 𝐹2
4 (1 + 𝑗)𝑛 − 1
𝑖4 0.05 1 𝐹=𝑅
(1 + 4 ) = (1 + ) 𝑗
1
𝑖4
1
4( )
4 0.05 1(4)
1 (1 + 0.0122722344)20 − 1
(1 + 4 ) = (1 + ) 𝐹 = 40,000
1 0.0122722344
1
𝑖4
𝑗= = (1.05) − 1
4 𝑭 = 𝑷𝒉𝒑 𝟗𝟎𝟎, 𝟓𝟎𝟗. 𝟒𝟎
4
𝒊𝟒
𝒋= = 𝟎. 𝟎𝟏𝟐𝟐𝟕𝟐𝟐𝟑𝟒𝟒
𝟒

Thus, the Fair Market Value (FMV) = 63,814.08 + 900,509.40

= Php 964,323.48

Therefore, Mr. Ocampo’s offer has a higher market value regardless of the focal date whether at the end
or at the beginning of the term.
Note that the difference between the market values of the two offers at the end of the term is

Php 1,063,814.08 – Php 964,323.48 = Php 99,490.60

It can also be check that the present value of the difference is the same as the difference computed
when the focal date was the start of the term:

𝑃 = 99,490.60(1 + 0.05)−5 = 𝑷𝒉𝒑 𝟕𝟕, 𝟗𝟓𝟑. 𝟒𝟗

Activity 1.
Company A offers P150,000 at the end of 3 years plus P400,000 at the end of 5 years. Company
B offers P25,000 at the end of each quarter for the next 5 years. Assume that money is worth 8%
compounded annually. Which offer has a better market value? Use the focal date at the end of the term.
Page 2 of 6
 Deferred Annuity

Definition of Terms:
• Annuity – a sequence of payments made at equal (fixed) intervals or periods of time.
• Annuity Immediate or Ordinary Annuity – a type of annuity in which the payments are made at
the end of each period.
• Deferred Annuity – an annuity that does not begin until a given time interval has passed.
• Period of Deferral – time between the purchase of an annuity and the start of the payments for the
deferred annuity.

Examples of deferred annuity in real life.

• A credit card company offering its clients to purchase today but to start paying monthly with their
choice of term after 3 months.

• A real estate agent is urging a condominium unit buyer to purchase now and start paying after 3
years when the condominium is ready for occupancy.

• A worker who has gained extra income now and wants to save his money so that he can withdraw
his money monthly starting on the day of his retirement from work.

Review:
Suppose Mr. Gran wants to purchase a cellular phone. He decided to pay monthly for 1 year starting at
the end of the month. How much is the cost of the cellular phone if his monthly payment is P2,500 and interest
is at 9% compounded monthly?

Solution:
Given: 𝑅 = 2,500 𝑡 = 1 𝑦𝑒𝑎𝑟
𝑖 12 = 0.09 𝑚 = 12
0.09
𝑗 = 12 𝑛 = 𝑚𝑡 = (12)(1) = 12
Find: P

2,500 2,500 2,500 …_____2,500

0 1 2 3 … 12

1 − (1 + 𝑗)−𝑛
𝑃=𝑅
𝑗
0.09 −12
1 − (1 + )
12
𝑃 = 2,500 0.09
12

𝑷 = 𝑷𝒉𝒑 𝟐𝟖, 𝟓𝟖𝟕. 𝟐𝟖

Thus, the cost of the cellular phone is P 28,587.28.

Example 1. Recall the previous example.

What if Mr. Gran is considering another cellular phone that has a different payment scheme? In this
scheme, he has to pay P2,500 for 1 year starting at the end of the fourth month. If the interest rate is also 9%
converted monthly, how much is the cash value of the cellular phone?

“Note that the two payment schemes have the same number of payments n and the
same interest rate per period j. Their main difference is the start of the payments. The first
scheme started at the end of the first interval which makes it an ordinary annuity. The second
scheme started on a later date. This annuity is called deferred annuity.”

In this example, Mr. Gran pays starting at the end of the 4 th month to the end of the 15th month. The time
diagram for this option is given by:

Find: P
2,500 2,500 2,500 …___ _2,500
0 1 2 3 4 5 6 … 15

Now, how do we get the present value of this annuity?

Page 3 of 6
Solution:
Step 1. Assume that payments are also being made during the period of deferral; in other words, there
are no skipped payments. The associated time diagram is:
Find: P’
2,500 2,500 2,500 2,500 2,500 2,500 …___ _2,500
0 1 2 3 4 5 6 … 15
1−(1+𝑗)−𝑛
𝑃′ = 𝑅 𝑗
0.09 −15
1 − (1 + )
12
𝑃′ = 2,500 0.09
12

𝑷′ = 𝑷𝒉𝒑 𝟑𝟓, 𝟑𝟒𝟐. 𝟒𝟗

Step 2. Find the present value of the payments made during the period of deferral. The present value 𝑃∗
of the 3 artificial payments during the period of deferral is:
Find: 𝑃∗
1−(1+𝑗)−𝑛
𝑃∗ = 𝑅 𝑗
0.09 −3
1 − (1 + )
∗ 12
𝑃 = 2,500 0.09
12
∗
𝑷 = 𝑷𝒉𝒑 𝟕, 𝟑𝟖𝟖. 𝟖𝟗

Step 3. Since the payments in the period of deferral are artificial payments, we subtract the present
value of these payments.

𝑷 = 𝑷′ − 𝑃∗
𝑷 = 𝟑𝟓, 𝟑𝟒𝟐. 𝟒𝟗 − 𝟕, 𝟑𝟖𝟖. 𝟖𝟗
𝑷 = 𝑷𝒉𝒑 𝟐𝟕, 𝟗𝟓𝟑. 𝟔𝟎
Thus, the present value of the cellular phone is 𝑃ℎ𝑝 27,953.60

Comparing the present values of the two schemes, the present value in the second scheme is lower
than the present value in the first scheme because payments in the second scheme will be received on a later
date.

Present Value of a Deferred Annuity

Consider the following time diagram where k represents artificial payments of 𝑅 ∗ are placed in the period
of deferral.

𝑅∗ 𝑅∗ … 𝑅∗ R R …___ ___R__
0 1 2 … k k+1 k+2 … k+n

Formula for the Present Value of a Deferred Annuity

𝟏−(𝟏+𝒋)−(𝒌+𝒏) 𝟏−(𝟏+𝒋)−𝒌 where, R is the regular payment

𝑷=𝑹 −𝑹 j is the interest rate per period
𝒋 𝒋
n is the number of payments
k is the number of conversion periods in the period
of deferral (or number of artificial payments)

Example 2. A credit card company offers a deferred payment option for the purchase of any appliance. Rose
plans to buy an android television set with monthly payments of P4,000 for 2 years. The payments
will start at the end of 3 months. How much is the cash price of the TV set if the interest rate is 10%
compounded monthly?
Solution:
Given: 𝑅 = 4,000 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑟𝑡𝑖𝑓𝑖𝑐𝑖𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠: 𝑘 = 2
𝑡=2 𝑛𝑢𝑚𝑏𝑒𝑟𝑜𝑓𝑎𝑐𝑡𝑢𝑎𝑙𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠: 𝑛 = 𝑚𝑡 = (12)(2) = 24
0.10
𝑖 12 = 0.10 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑: 𝑗 =
12
𝑚 = 12
Find: P
𝟏−(𝟏+𝒋)−(𝒌+𝒏) 𝟏−(𝟏+𝒋)−𝒌
𝑷=𝑹 −𝑹
𝒋 𝒋
0.10 −(𝟐+𝟐𝟒) 0.10 −𝟐
𝟏−(𝟏+ ) 𝟏−(𝟏+ )
12 12
𝑷 = 𝟒𝟎𝟎𝟎 0.10 − 𝟒𝟎𝟎𝟎 0.10
12 12
𝑷 = 𝟗𝟑, 𝟏𝟓𝟕. 𝟔𝟔 − 𝟕, 𝟗𝟎𝟏. 𝟏𝟎
𝑷 = 𝑷𝒉𝒑 𝟖𝟓, 𝟐𝟓𝟔. 𝟓𝟔
Thus, the cash price of the android TV is Php 85,256.56.
Page 4 of 6
 Activity 2. Find the period of deferral in each of the following deferred annuity problem (one way to find the period
of deferral is to count the number of artificial payments).

1. Monthly payments of P2,000 for 5 years that will start 7 months from now.
2. Annual payments of P8,000 for 12 years that will start 5 years from now.
3. Quarterly payments of P5,000 for 8 years that will start 2 years from now.

Activity 3. Solve the following problems involving deferred annuity.

1. Emma availed of a cash loan that gave her an option to pay P10,000 monthly for 1 year. The
first payment is due after 6 months. How much is the present value of the loan if the interest
rate is 12% converted monthly?

IV. ASSESSMENT

Multiple Choice: Choose the letter of the correct answer.

_____ 1. Which of the following refers to a single amount that is equivalent to the value of the payment stream at a
certain focal date in a payment stream?
A. cash flow B. fair market value C. future value D. principal value

_____ 2. What term is given to the payments received, or payments or deposits made?
A. cash flow B. cash price C. focal date D. single amount

_____ 3. What is referred as the time between the purchase of an annuity and the start of the payments for the
deferred annuity?
A. cash inflow B. focal date C. payment period D. period of deferral

_____ 4. Find the period of deferral in the situation: “Semi-annual payments of P60,000 for 3 years that will start 5
years from now”.
B. 4 periods B. 5 periods C. 9 periods D. 10 periods

_____ 5. How many skipped payments there will be in the situation: “Monthly payments of P10,000 for 8 years that will
start at the end of 6 months”?
A. 5 B. 6 C. 7 D. 8

_____ 6. What is the value of artificial payments in the situation: “Payments of P5,000 every 4 months for 10 years that
will start 5 years from now”.
A. 10 B. 14 C. 15 D. 19

For items 7–9, refer to the problem:

“Kat received two offers for investment. The first one is P150,000 every year for 5 years at 9% compounded
annually. The other investment scheme is P12,000 per month for 5 years at 9% compounded annually.”

_____ 7. Using the focal date at the end of the term, what is the fair market value of the first offer?
A. 821,128.23 B. 852,943.92 C. 897,706.59 D. 921,652.12

_____ 8. Using the focal date at the end of the term, calculate the fair market value of the other offer?
A. 803,322.37 B. 842,621.11 C. 896,794.44 D. 100,062.23

_____ 9. Which offer is better?

A. 1st offer C. the two offers are the same
B. B. 2nd offer D. cannot be determined

For items 10–15, refer to the problem:

“A loan of P30,000 is to be repaid monthly for 5 years that will start at the end of 4 years with interest rate of
12% converted monthly.”

_____ 10. What type of annuity illustrated in the problem?

A. deferred annuity B. general annuity C. ordinary annuity D. simple annuity

_____ 11. What is the total number of payments?

A. 20 B. 48 C. 60 D. 120

_____ 12. What is the number of conversion period in the period of deferral?
A. 47 B. 48 C. 50 D. 60

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_____ 13. What is the interest rate per period?
A. 0.1% B. 1% C. 10% D. 12%

_____ 14. What is the present value of the loan?

A. P28,542.11 B. P30,000 C. P32,063.21 D. P35,000

_____ 15. Calculate the monthly payment.

A. P1,065.24 B. P1,536.71 C. P1,221.89 D. P1,852.23

V. ENRICHMENT

Answer the following problems by showing your solutions.

1. Which investment is preferable? (Hint: Compute for the fair market value using the focal date at the end of
the term.) Assume that money is worth 8% compounded annually.
Corporation X offers P100,000 at the end of 2 years plus P200,000 at the end of 4 years.
Corporation Y offers P20,000 at the end of each quarter for 4 years.

2. A brand-new car is to be purchased in monthly payments of P23,000 for 5 years starting at the end of 4
months. How much is the cash value of the car if the interest rate used is 12% converted monthly?

KEY TO ANSWERS

𝑷 = 𝑷𝒉𝒑 𝟏𝟎𝟔, 𝟎𝟐𝟕. 𝟗𝟑

𝑃 = 163,982.69 − 57,954.76
12 12
0.12 − 10,000 0.12 𝑃 = 10,000
12 12
1−(1+ ) 1−(1+ )
0.12 −6 0.12 −(6+12)

𝑗 𝑗
−𝑅 𝑃=𝑅
1−(1+𝑗)−𝑘 1−(1+𝑗)−(𝑘+𝑛)
Activity 3.

3. 7 periods or 7 quarters
2. 4 periods or 4 years
1. 6 periods or 6 months
Activity 2.

Thus, company B has a better FMV.

𝑭 = 𝑷𝒉𝒑 𝟔𝟎𝟑, 𝟗𝟕𝟕. 𝟕𝟒

0.01942654691
𝐹 = 25,000
(1+0.01942654691)20 −1
𝑗
𝐹=R
(1 + 𝑗)n − 1
4
𝑗 = = 0.01942654691
𝑖4
1 4
−1 ) = (1 + 𝑗=
0.08 4 𝑖4
1
The future value of quarterly payments of P25,000 for 5 years is:
Company B

𝐹𝑀𝑉 = 574,960
𝐹𝑀𝑉 = 174,960 + 400,000
FMV of Company A:
𝐹 = 𝑃ℎ𝑝 174, 960
(note that the money will be compounded for 2 years) 𝐹 = 150,000(1 + 0.08)2
𝐹 = P(1 + 𝑗)𝑛
The future value of P150,000 after 5 years is:
The future value of P400,000 at the end of 5 years is P400,000.
Company A

P400,000 at the end of 5 years

P25,000 at the end of each quarter for 5 years P150,000 at the end of 3 years
Company B Company A
Activity 1

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