CE40-2 – CW1

1. A person buys a piece of property for P100,000 down payment and the 10 deferred semi-
annual payments of P8,000 each starting 3 years from now. What is the present value (in P) of
the investment if the rate of interest is 12% compounded semi-annually?
Solution:
Cash Flow Diagram,

Computation for Present Value,

𝐷𝑜𝑤𝑛𝑝𝑎𝑦𝑚𝑒𝑛𝑡 = 𝑃𝐻𝑃 100,000.00
𝐴 = 𝑃𝐻𝑃 8,000.00
𝑟 12%
𝑖= = = 6% = 0.06
𝑚 2
𝑛 = 10 𝑦𝑒𝑎𝑟𝑠
𝐴[(1 + 𝑖)𝑛 − 1]
𝑃1 =
𝑖(1 + 𝑖)𝑛
𝐴[(1 + 𝑖)𝑛 − 1] 8000[(1 + 0.06)10 − 1]
𝑃1 = = = 58,880.6964
𝑖(1 + 𝑖)𝑛 (0.06)(1 + 0.06)10
𝑃1 = 58,880.6964
𝑃1 = 𝑃2 (1 + 𝑖)𝑛
58880.6964 = 𝑃2 (1 + 0.06)5
𝑃2 = 43,999.0816

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 𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 = 𝐷𝑜𝑤𝑛𝑝𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃2
𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 = 100000 + 43999.0816 = 143,999.0816 ≈ 𝑃𝐻𝑃 143,999.08
∴ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑚𝑜𝑢𝑛𝑡 = 𝑃𝐻𝑃 143,999.08

2. Suppose a man receives an initial annual salary of P60,000 increasing at the rate of P5,000 a
year. If money is worth 10%, determine his equivalent uniform salary (in P) for a period of 8
years.
Solution:
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑎𝑟𝑦 = 𝐵𝑎𝑠𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 + 𝐴𝑛𝑛𝑢𝑎𝑙 𝑊𝑜𝑟𝑡ℎ 𝑜𝑓 𝐺𝑟𝑎𝑑𝑖𝑒𝑛𝑡
1 𝑛
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑎𝑟𝑦 = 𝑃𝐴 + 𝑃𝐺 = 𝑃𝐴 + 𝐺(𝐴⁄𝐺 , 𝑖%, 𝑛) = 𝑃𝐴 + 𝐺( − )
𝑖 (1 + 𝑖)𝑛 − 1
1 8
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑎𝑟𝑦 = 60000 + 5000(𝐴⁄𝐺 , 10%, 8) = 60000 + 5000( − )
0.10 (1 + 0.10)8 − 1
1 8
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑎𝑟𝑦 = 60000 + 5000 ( − ) = 75022.39297 ≈ 75,022.39
0.10 (1 + 0.10)8 − 1
∴ 𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑎𝑟𝑦 = 75,022.39

3. A four-year lease agreement requires payments of $10,000 at the beginning of every year. If
the interest rate is 6% compounded monthly, what is the cash value (in $) of the lease?
Solution:
Cash Flow Diagram,

Cash Value of the Lease,

𝐴 = $ 10,000.00
𝑟 6% 6
𝑖= = =
𝑚 12 1200
𝑛 = 4 𝑦𝑒𝑎𝑟𝑠
10000 10000 10000
𝑃 = 10000 + + + = 36647.35927 ≈ 36,647.36
6 12 6 24 6 36
(1 + 1200) (1 + 1200) (1 + 1200)

∴ 𝑃 = $ 36,647.36

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https://www.coursehero.com/file/119306749/03-CE40-2-Module-1-CW1-2pdf/
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