INFLATION

- Is the increase in the price for goods and services from one year to another, thus decreasing the purchasing
power of money.

n
FC =PC ( 1+ f )
Where: PC= present cost of a commodity
FC= future cost of the same commodity
f= annual inflation rate
n= number of years

Example 1:
An item presently costs Php 1000. If the inflation rate is at the rate of 8% per year. What will be the cost of
the item in two years?

In inflationary economy, the buying power of money decrease as cost increase, Thus

P
F=
( 1+ f )n
Where: F is the future worth, measure in todays pesos of the present amount P.

Example 2:
An economy is experiencing inflation rate at an annual rate of 8%. If this continues, what will Php 1000 be
worth two years from now
If interest is being compounded at the same time that inflation rate is occurring, the future worth will be:

P ( 1+i )n
( )
n
1+i
F= n or F=P
(1+ f ) 1+f

Example 3
A man invested Php 10000 at an interest rate of 10% compounded annually. What will be the final amount
of his investment, in terms of today’s pesos, after five years, if the inflation remains the same at the rate of
8% per year?
ANNUITIES -is a series of equal payment occurring at equal periods of time.

TYPES OF ANNUTIES

- ORDINARY ANNUITIES
- DEFFERED ANNUITIES
- ANNUITY DUE
- PERPETUITY

ORDINARY ANNUITIES- is one where the payment are made at the end of each period.

From the cash flow diagram shown above, the future amount F is the sum of payments starting from the end of the first
period to the end of the nth period. Observe that the total number of payments is n and the total number of
compounding periods is also n. Thus, in ordinary annuity, the number of payments and the number of compounding
periods are equal.

Present amount of ordinary annuity, P

( 1+ i )n −1
The factor n is called equal-payment-series present-worth factor and is denoted by (P/A,i,n)
( 1+i ) i

[ ]
−n
1− ( 1+1 )
Or P= A
i
 Where

P= value or sum of money at present

A= a series of periodic equal amounts of money

i=interest rate per interest period

n= number of interest periods

Future amount of ordinary annuity, F

( 1+ i )n −1
The factor is called equal-payment-series compound-amount factor and is denoted by (F/A,i,n)
i
Where

F= value or sum of money at some future time

A= a series of periodic equal amounts of money

i=interest rate per interest period

n= number of interest periods

Example 4:

What are the present worth and the accumulated amount of a 10 year annuity paying Php 10, 000 at the end of each
year, with 10% interest compounded annually?
2. What are the present worth and the accumulated amount of a 10 year annuity paying Php 10, 000 at the end of each
year, with 10% interest compounded quarterly?

How much must be deposited at 6% each year beginning on January 1, year 1, in order to accumulate Php. 5,000,000 on
the date of the last deposit, January 1, year 6.
Example3:

A man paid 10% down payment of Php. 200, 000 for a house and lot and agreed to pay the 90% balance on monthly
installment for 60 months at an interest rate of 15% compounded monthly. Compute the amount of the monthly
payment?

Example 4:
Mr. Ramirez borrowed Php 15,000 two years ago. The terms of the loan are 10% interest for 10 years with uniform
payment. He just made second annual payment. How much principal does he still owes?
Example 5:

A man inherited a regular endowment of Php. 100,000 every end of 3 months for 10 years. However, he may choose to
get a single lump sum payment at the end of 4 years. How much is this lump sum if the cost of money is 14%
compounded quarterly?