宿务亚典耀圣心学校

SACRED HEART SCHOOL – ATENEO de CEBU

H. Abellana St., Canduman, Mandaue City
SENIOR HIGH SCHOOL
School Year 2022 -2023

Unit 1 – Mathematics of Investment, Part 2

Competencies Measured:
1. Differentiate investments that require lump-sum or periodic payments.
2. Differentiate consistent from inconsistent cash flows.
3. Use timelines to visually present the calculations of the present and future values of ordinary annuities and annuity dues.
4. Calculate an ordinary annuity’s present or future value.
5. Calculate an annuity due’s present or future value.

I want you to understand these:

The higher the financial instrument’s risk is, the higher its returns will be.

Different investments have different payment methods, which leads to deciding the right investment for an
individual.
Review of terms in Business Mathematics lesson on Investment
• Time Value of Money (TMV) – This is the concept saying that the money you get now is worth more
than the equal amount of money you get in the future.
o The prevailing question of time value of money is: Would you rather get that sum of money now
or get that equal sum of money sometime in the future?
• Compound interest – The interest you earned from previous periods accumulate and also earn
interest in itself. The picture on the right sums up the difference between simple interest (linear
growth) and compound interest (exponential growth).
• Timelines – Visual representation of the long-term financing/investment problem at-hand.
Moving forward to the topics for Business Finance
In Business Mathematics, you have solved for different problems for single, lump-sum payments. These mean
that investments and other financing instruments only require one payment from the investor or depositor. As
lump-sum payments are more formally used in the business parlance, a more colloquial and informal term to
refer to these payments are “one-time payments.”
Let’s refresh your memory and see what these lump-sum payments look like in a timeline.

As you can see in the sample timeline found in the picture on the left, the $100 is what we refer
to as the “lump-sum payment.” And again, lump-sum payments are only single payments made
at a particular time.

To quickly solve for these single, lump-sum payments, we use the following formulas

Wherein:
FV = Future Value
𝑖 𝑛 ×𝑡 𝑖 −(𝑛 ×𝑡) PV = Present Value
𝐹𝑉 = 𝑃𝑉 (1 + ) 𝑃𝑉 = 𝐹𝑉 (1 + )
𝑛 𝑛 i = interest rate
n = number of compounding periods during a year
t = lifespan of investment or deposit
 HOLD IT 1.1: Make sure that you remember how to solve for single,lump-sum
payments. Use the correct formula to solve for the investment problem.

1. How much will an investor receive on his P20,000 investment if the money has been
compounded semi-annually at 6% for 10 years.

2. A 15-year-old student wants to have P30,000 in his bank account by the time he
reaches 25 years old. How much should he deposit now if money is subjected to a 3%
rate compounded monthly?

And in reality, there are two classifications of “payment streams.” The first, as discussed, is the “lump sum payment” and the second is the “installment
payments.” Installments, as defined, are sums of money due as one of several payments for something, spread over an agreed period of time. In short,
installments are sums of money that are paid, invested, or received more than once. Installments are also known as “periodic payments” as they are again
paid, invested, or received periodically.
Periodic Payments
By the nature of these payments, there are two more subclassifications. These are what we call even and uneven cash flows. Even cash flows are equal and
consistent in nature. Meaning, the periodic payments are equal all throughout (e.g., P10,000 equal all throughout the life of the investment) and do not skip
any periods within the timeline.
Uneven cash flows are obviously the opposite of even cash flows. Periodic payments are unequal and inconsistent.
Even and uneven cash flows use different methods in getting the present value or the future value.
Uneven cash flows are manually calculated for the determination of its present value and future value while even cash flows have different formulas,
depending on what an individual chooses when investing.
Even vs. Uneven Cash Flows
What do even cash flows look like?

In a timeline, these periodic cash flows are uninterrupted (do not

skip a timeline period) or are equal all throughout the investment’s
or deposit’s life.

What do uneven cash flows look like?

Treatment of uneven cash flows
• There is a common ground on the treatment of interrupted, uneven, or a combination uneven cash flow.
• The main idea on its treatment is counting how many periods you have to “cross-over” or “pass” UNTIL you reach the first time period (for present value
calculations) or the last time period (for future value calculations). With this, you either discount or compound all cash flows present in the time line, in accordance
with the problem.
• Add all discounted or compounded cash flows in the first time period or last time period to get your total present value or future value.

Note:
Problems that involve periodic payments (both even and uneven) will all have interest compounded or discounted annually.
Illustration (PV):
Illustration (FV):

Note:
• Notice that the P15,000 in the last time period of the future value illustration is untouched. This is the case because the cash flow found in the last time period is
already considered to be in its “future value” form already. In which, the time value of money and compounding concepts don’t apply to it.
What are instances wherein discounting or compounding a time period’s cash flow is not necessary?
• In present value problems, the cash flow found in time period 0 is not subjected to discounting calculations.
• In future value problems, the cash flow found in the last time period is not subjected to compounding calculations.

HOLD IT 1.2: Make sure that you understand what you’re reading so far.Using the
knowledge that you have gained on uneven cash flows, look for the present andfuture
value of the timeline below.
One more thing for uneven cash flows…

Do you see the negative sign in cash flow on the fourth period? In this unit and the next, there will be instances that some periods will have cash flows with negative signs.
What does this mean?
A negative cash flow signifies a cash outflow. This means that an individual or an organization has spent money on purchases, loan and interest payments, and other
transactions that cash is flowing out from the individual or the organization.
A positive cash flow would signify a cash inflow. This happens when an individual or an organization has earned money on income, sales, revenues, and other gains from
sales. All these transactions have cash flowing into the individual or organization.
EVEN CASH FLOWS
Ordinary Annuities
An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time

Characteristics in the timeline

• Equal payments made throughout consecutive periods (follows the consistency concept)
• These payments are made AT THE END of these consecutive periods
• These consecutive periods cover only a fixed length of time

Illustration (PV)
Formula
1 − (1 + 𝑖)−𝑛
𝑃𝑉𝑂𝐴 = 𝑃𝑀𝑇 ( )
𝑖
Wherein:
PVOA = Present Value of Ordinary Annuity
PMT = amount of periodic payment
i = interest rate
n = number of periodic payments

Solving for the illustration using the formula:

1 − (1 + 𝑖)−𝑛
𝑃𝑉𝑂𝐴 = 𝑃𝑀𝑇 ( )
𝑖
1 − (1 + .05)−5
𝑃𝑉𝑂𝐴 = 15,000 ( )
. 05

𝑃𝑉𝑂𝐴 = 15,000(4.329476671)
𝑃𝑉𝑂𝐴 = 64,942.15
Note:

• There might be very small discrepancies or differences between solving for the present value of an ordinary annuity using the step
by step/time line approach and the formula approach. This small difference is found in the centavos portion of the final answers.
• When solving for ordinary annuities, use the formula approach. It is more convenient and accurate.
Illustration (FV):
Formula

(1 + 𝑖)𝑛 − 1
𝐹𝑉𝑂𝐴 = 𝑃𝑀𝑇 ( )
𝑖
Wherein:
FVOA = Future Value of Ordinary Annuity
PMT = amount of periodic payment
i = interest rate
n = number of periodic payments
Solving for the illustration using the formula:
(1 + 𝑖)𝑛 − 1
𝐹𝑉𝑂𝐴 = 𝑃𝑀𝑇 ( )
𝑖
(1 + .05)5 − 1
𝐹𝑉𝑂𝐴 = 15,000 ( )
. 05
𝐹𝑉𝑂𝐴 = 15,000(5.52563125)
𝐹𝑉𝑂𝐴 = 82,884.47
Moving Forward…
Dear student, do take note that problems might be in the form of a word problem or a timeline problem. As long as you understand the structure
and the use of the timeline and its connection with the formula, then you will have no issue solving for investment problems in words. Let’s try to
see what word problems look like for periodic payment investments.

HOLD IT 1.3: Make sure that you understand what you’re reading so far.
Using the knowledge that you have gained on ordinary annuities, look for either the
present or future value of the word problems below. And as advised, use the formula
approach to solve.

1. An investor will earn a constant flow of P27,500 every year-end for 8 years. Money
is compounded annually at 4%. How much will this be worth in total in terms of
today's money?
2. You were given 4 options for potential investments. One investment had equal 6 year-end
positive cash flows of 1,250,000 and money is believed to be compounded annually at
9%. How much will this investment be worth in the future if you pursue this investment?

Additional requirement:
Solve the two items above again but use the formula of the other TMV concept. In other
words, if you originally solved for an item that is intended to be PV, solve it again and
now use the FV formula.
Annuity Due
An annuity due is a series of equal payments made at the beginning of consecutive periods over a fixed length of time

• Equal payments made throughout consecutive periods (follows the consistency concept)
• These payments are made AT THE BEGINNING of these consecutive periods
• These consecutive periods cover only a fixed length of time

Illustration (PV)
Formula

1 − (1 + 𝑖)−𝑛
𝑃𝑉𝐴𝐷 = 𝑃𝑀𝑇 ( ) × (1 + 𝑖)
𝑖

Wherein:
PVAD = Present Value of Annuity Due
PMT = amount of periodic payment
i = interest rate
n = number of periodic payments

Solving the illustration using the formula

1 − (1 + 𝑖)−𝑛
𝑃𝑉𝐴𝐷 = 𝑃𝑀𝑇 ( ) × (1 + 𝑖)
𝑖

1 − (1 + .05)−5
𝑃𝑉𝐴𝐷 = 15,000 ( ) × (1 + .05)
. 05

𝑃𝑉𝐴𝐷 = 15,000(4.545950504)
𝑃𝑉𝑂𝐴 = 68,189.26
Illustration (FV)
Formula

(1 + 𝑖)𝑛 − 1
𝐹𝑉𝐴𝐷 = 𝑃𝑀𝑇 ( ) × (1 + 𝑖)
𝑖
Wherein:
FVAD = Future Value of Annuity Due
PMT = amount of periodic payment
i = interest rate
n = number of periodic payments
Solving for the illustration using the formula:
(1 + 𝑖)𝑛 − 1
𝐹𝑉𝐴𝐷 = 𝑃𝑀𝑇 ( ) × (1 + 𝑖)
𝑖
(1 + .05)5 − 1
𝐹𝑉𝐴𝐷 = 15,000 ( ) × (1 + .05)
. 05

𝐹𝑉𝐴𝐷 = 15,000(5.801912813)
𝐹𝑉𝐴𝐷 = 87,028.69
 HOLD IT 1.4: Make sure that you understand what you’re reading so far.Using the
knowledge that you have gained on annuity dues, look for either the present orfuture
value of the word problems below. And as advised, use the formula approach to solve.

1. Mr. A is planning to deposit P35,000 every year starting at the beginning of the year. He
plans to do this for 7 time periods and money is compounded annually at 3%. How much
will his deposit be by the maturity year?
2. Mr. B plans to invest P30,000 every beginning of the year. This investment will be used
for his business. Money is compounded annually at 6% for 5 periods. How much will Mr.
B earn in total for this investment?

Additional requirement:
Solve the two items above again but use the formula of the other TMV concept. In other
words, if you originally solved for an item that is intended to be PV, solve it again and
now use the FV formula.