PROFIT-LOSS,

INTEREST RATE,
DISCOUNT,
COMMISSION ,
BROKERAGE &
ANNUITY
PROFIT AND LOSS
• It is used in mathematics to determine the price of a commodity in the market and understand
how profitable a business is. Every product has a cost price and selling price. Based on the
values of these prices, we can calculate the profit gained or the loss of money for a particular
product. The important terms covered here are cost price and fixed, variable and semi-variable
cost, selling price, marked price, list price, margin etc. Also, we will learn the profit and loss
percentage formula here.

• For example, for a shopkeeper, if the value of selling price is more than the cost price of a
commodity, then its a profit and if the cost price is more than the selling price, it becomes a
loss. Here, in this article, we will discuss profit as well as loss concepts along with tricks to
solve problems based on it.
• Profit and Loss Basic Concepts
• Let us learn profit and loss concepts in maths. It is well explained in terms of cost price and
selling price.
• Profit(P)
• The amount gained after selling a product more than its cost price.
• Loss(L)
• The amount, the seller gets after selling the product less than its cost price, is mentioned as a
loss.
• Cost Price (CP)
• The amount paid for a product or commodity to purchase it is called a cost price. Also, denoted
as CP. This cost price is further classified into two different categories:
• Fixed Cost: The fixed cost is constant, it doesn’t vary under any circumstances
• Variable Cost: It could vary depending as per the number of units
• Selling Price (SP)
• The amount for which the product is sold is called Selling Price. It is usually denoted as SP.
Also sometimes called a sale price.
PROFIT AND LOSS FORMULAS
• Now let us find profit formula and loss formula.
• The profit or gain is equal to the selling price minus cost price.
• Loss is equal to cost price minus selling price.
• Profit or Gain = Selling price – Cost Price
• Loss = Cost Price – Selling Price
• The formula for the profit and loss percentage is:

• Profit percentage = (Profit /Cost Price) x 100

• Loss percentage = (Loss / Cost price) x 100
 Formulas
Gain=(S.P)-(C.P)
Loss= (C.P)-(S.P)
 Loss 100 
 Gain  100  Lo ss %  
Gain %    C.P 
C.P 

S .P 
1 0 0  G a in  C .P
%  100

S .P 
1 0 0  L o ss  C .P
%  100
 C .P  100
100  G a i n  S .P

%  100

C .P  S .P
100  Gain
%
When a person sells two similar items, one at a gain
of x%, and the other at a loss of x%, then the seller
always incurs a loss given by
2 2
  x 
 CommonLossandGain%
Loss%   10    10


• A person purchased an article for Tk 100. If he sells it at a 15% profit then find his selling
price.
• Solution: SP = CP [ 1 + ( Gain % x 100) ]
• SP = 100 [ 1 + (15/100) ]
• = 100 x 1.15
• = 115.
• The article selling price is Tk 115
• If the cost of 25 pens is equal to the selling price of 15 pens. what is the gain or loss%?
• Solution: The Profit percent = [ pens left / pens Sold ] x 100
• Profit % = [ ( 25 – 15) / 15 ] x 100 = 10 × 100 / 15 = 1000/15 = 66.67%
DISCOUNT
DISCOUNT
• Discounts: In order to give a boost to the sale of an item or to clear the old stock, sometimes
the shopkeepers offer a certain percentage of rebate on the marked price. This rebate is known
as discount.
• In order to increase the sale or clear the old stock, sometimes the shopkeepers offer a certain
percentage of rebate on the marked price. This rebate is known as discount.

The discount is always reckoned on the marked price.

Selling price = (marked price) - (discount)

'selling price' is the amount you actually pay for the thing when you purchase.
'marked price' is the general price of the thing without any discount.
'discount' is a percentage of the marked price.
• Definition of Trade Discount
• Trade discount is referred to as a discount, given by the seller to the buyer at
the time of purchase of goods, as a deduction in the list price of the quantity
sold. The trade discount is used by the sellers to attract more customers and
increase the quantity sales. There is no record maintained in the books of both
the buyer and seller for such a discount.

• Definition of Cash Discount

• Cash Discount is referred to as a discount, allowed to customers by the seller at
the time of making the payment of purchases, as a reduction in the invoice
price of the commodity. A cash discount is used by the sellers to facilitate a
prompt payment and thereby to avoid the credit risk. Both the buyers and
sellers keep a proper record of such discount in their books of accounts.
BASIS FOR COMPARISON TRADE DISCOUNT CASH DISCOUNT
Meaning A discount given by the seller to A deduction in the amount of
the buyer as a deduction in the list invoice allowed by the seller to
price of the commodity is trade the buyer in return for immediate
discount. payment is cash discount.
Purpose To facilitate a bulk sales. To facilitate a prompt payment.
Invopice It is shown in invoice as a It is not shown in invoice.
deduction itself.
When allowed? At the time of purchase. At the time of payment.
Allowed to all customers Yes No
Entry in books No Yes
Vary with Time period, when payment is Quantity of goods purchased or
made. amount of purchases made.
• The marked price of a ceiling fan is Tk 1250 and the
shopkeeper allows a discount of 6% on it. Find the selling
price of the fan.
Marked price = $ 1250 and discount = 6%.
Discount = 6% of Marked Price
= (6% of $ 1250)
= $ {1250 × (6/100)}
= $ 75

Selling price = (Marked Price) - (discount)

= $ (1250 - 75)
= $ 1175.

Hence, the selling price of the fan is $ 1175.

A TRADER MARKS HIS GOODS AT 40% ABOVE THE COST
PRICE AND ALLOWS A DISCOUNT OF 25%. WHAT IS HIS
GAIN PERCENT?
A TRADER MARKS HIS GOODS AT 40% ABOVE THE COST
PRICE AND ALLOWS A DISCOUNT OF 25%. WHAT IS HIS
GAIN PERCENT?

Let the cost price be $ 100.

Then, marked price = $ 140.
Discount = 25% of Marked Price
= (25% of $ 140)
= $ {140 × (25/100)
= $ 35.
Selling price = (marked price) - (discount)
= $ (140 - 35)
= $ 105.
Gain% = (105 - 100) % = 5%.
Hence, the trader gains 5%.
INTEREST
 INTEREST
 The word interest originates from the Latin
word intereo (to be lost).

 The word usury is usually associated with

lending at an excessive rate.
 INTEREST
 Interest is money earned when money is
invested.
 Interest is charge incurred when a loan or
credit is obtained.
It is usually expressed as per cent per
annum.
Type of interest:
a) simple interest
b) compound interest
SIMPLE INTEREST FORMULA
Simple interest, I is the interest calculated on
the original principal for the entire period it
is borrowed or invested.

I = Prt
P  principal
r  rate of simple interest
t  time or terms in years
EXAMPLE 1

RM1,000 is invested for 2 years in a bank,

earning a simple interest rate of 8% per
annum. Find the simple interest earned.

I = Prt

I  1000 8% (2)  RM 160

EXAMPLE 2

Mr. Abu deposited RM 6,000 in a bank and

obtained RM 120 simple interest after 3
months. Find the simple interest rate offered.

I = Prt

200  6000 r  3 

 12 
r 
0.08
r  8%
 SIMPLE AMOUNT FORMULA
Simple amount, S is the sum of the original
principal and the interest earned.

S = P 1  rt 
P  principal
r  rate of simple interest
t  time or terms in years
EXAMPLE 3

RM10,000 is invested for 4 years 9 months in

a bank earning a simple interest rate of 10%
per annum. Find the simple amount at the end
of the investment period.

S = P 1  rt 
  4 12  9
S  10000 1  10%  

  12
 
S  RM 14,750
EXAMPLE 4
John invests RM5,000 in an investment fund
for three years. At the end of the investment
period, his investment will be worth RM6,125.
Find the simple interest rate that is offered.
S = P 1  rt 
6125  5000 1  r
3 r  0.075
r  7.5%
 COMPOUND INTEREST

• The interest which is paid on

the principle as well as on the
accrued interest is called as
compound interest.
Explanation
• Consider vinay has borrowed Rs.50,000 from bank
with 4% rate of interest for two years.
• Vinay has to pay Rs.2000 as interest in the first year.
• If he couldn’t pay it then the interest will be added
to the principle i.e. sum = principle + interest
• Sum = Rs.50000+ Rs.2000 = Rs.52000.
Explanation

• Now vinay has to pay interest in

the second year with Rs.52000 as
new principle.
• This way of calculating interest is
known as compound interest.
COMPOUND INTEREST
FORMULA FOR COMPOUND
INTEREST
CALCULATION OF COMPOUND INTEREST IN DIFFERENT
WAYS

COMPOUND
INTERESET

COMPOUNDED COMPOUNDED COMPOUNDED

QUARTERL HALF ANNUALL
Y YEARLY Y
When compounded quarterly
When compounded half-
yearly
When compounded annually
A problem in compound
interest
COMMISSION,
BROKERAGE
COMMISSION
• A producer or manufacturer of goods generally does not sell his goods directly to the ultimate
consumer. There are agents who purchase the goods from the manufacturer and sell them to the
consumer. In a sense, such agents bring the manufacturers and the consumers together for
transaction. The remuneration which an agent gets for his services in the transaction is called
commission. Most of the business transactions are made through intermediate persons.

• The amount of commission that an agent gets in the transaction depends on the volume of work
done or the services rendered by him. His commission is based on the value of the goods bought
or sold and is generally fixed on a percentage basis. In some cases, he is paid a commission on
the total sales brought by the agent or on different slabs. For example, it may be 5% on the first
Rs. 10,000/-, 6% on the next Rs. 5,000/- and so on.
BROKER

• A broker is that middle-man who brings together a prospective

seller and a prospective buyer and negotiates the sale between them.
The commission that he gets is called brokerage, which may be
charged from both the parties. Accordingly, there are stock-brokers,
producer, brokers, bullion-brokers, bill-brokers, insurance-brokers
depending upon the field of business in which they work.
ANNUITY
The time value of money (TVM) is an economic principle that suggests present day
money is worth less than money in the future because of its earning power over time.

Debashis Saha, Assistant Professor, F & B,

52
Jahangirnagar University
Time value of Money
Money
Money has
has time
time values……..???
values……..???

The time value of money (TVM) is the concept that suggests present day money
is worth less than money in the future because of its earning power over time. A
taka today is more valuable than a taka a year hence

Risk
Risk -investment
-investment risk
risk that
that investors
investors undertake
undertake when
when putting
putting their
their
money
money into
into investment
investment assets.
assets.
Opportunity
Opportunitycost
costrefers
refersto
tothe
theloss
lossof
ofinvestment
investmentopportunities
opportunitiesand
andthe
thebenefit
benefit
WHY

associated
associatedwith
withthem
themdue
dueto tothe
thecommitment
commitmentof ofmoney
moneytotoanother
anotherinvestment
WHY

investment
for
foraaspecific
specificperiod
periodof
oftime.
time.
Inflation
Inflationisisreducing
reducingthe
thepurchasing
purchasingpower
powerof
ofmoney
moneybecause
becauseitit
increases
increasesthe
theprices
pricesof
ofgoods
goodsand
andservices.
services.Therefore,
Therefore,over
overtime
timethe
the
same
sameamount
amountof ofmoney
moneycan
can53purchase
purchasefewer
fewergoods
goodsand
andservices.
services.
DebashisSaha,
Debashis Saha, BBM(India), MBA( Germany)
Assistant Professor, F
& B, Jahangirnagar University
Formulas
Future
FutureValues
Values Of
Of AA
Single FV
FVtt ==CF
CF00 **(1+r)
(1+r)tt OR
OR FV
FVtt== PV
PV**(1+r)
(1+r)tt
SingleAmount
Amount

Present
PresentValues
Values Of
Of
AASingle PV
PV==CF
CFtt//(1+r)
(1+r)tt OR
OR PV
PV== FV
FVtt//(1+r)
(1+r)tt
SingleAmount
Amount

Future
FutureValues
Values Of
Of FVA
FVAtt ==AA**{[(1+r)
{[(1+r)tt –1]/r},
–1]/r},FVIFA
FVIFAt=t= {[(1+r)
{[(1+r)tt ––
An
AnAnnuity
Annuity 1]/r},
1]/r},
Present
PresentValues
Values Of
Of
An
PVA
PVAtt =A*
=A* {[1-(1+r)
{[1-(1+r)-t-t]/r}
]/r}
AnAnnuity
Annuity

PV
PVof
of aaPerpetuity
Perpetuity P=
P=A.
A.PVIFA
PVIFAr,r,∝∝,,PVIFA=
PVIFA=1/r
1/r

Intra-year
Intra-yearCompounding
Compounding Debashis Saha, Assistant Professor, F
54
& B, Jahangirnagar University
Variables

where
r = rate of return
t = time period
n = number of time periods
A = constant periodic flow
CF = Cash flow (the subscripts t and 0 mean at time t and at time zero,
respectively)
PV = present value (PVA = present value of an annuity)
FV = future value (FVA = future value of an annuity)

Debashis Saha, Assistant Professor, F & B, Jahangirnagar

55
University
Overview

Time value of Money

I. Using Time Lines
II. Future Values Of A Single Amount
III. Present Values Of A Single Amount
IV. Future Values Of An Annuity
V. Present Values Of An Annuity
VI. Perpetuity
VII. Intra-year Compounding And Discounting
Debashis Saha, Assistant Professor, F & B, Jahangirnagar
56
University
Using Time Lines
 Using Time Lines
AA timeline
timeline refers
refers to
to aa horizontal
horizontal line
line on
on which
which time
time zero
zero appears
appears
at
at the
the leftmost
leftmost end
end and
and future
future periods
periods areare marked
marked from
from left
left to
to
right;
right; can
can bebe used
used toto depict
depict investment
investment cash cash flows.
flows. Timeline
Timeline
identifies
identifies the
the timing
timing and
and amount
amount of of aa stream
stream of
of cash
cash flows
flows along
along
with
with the
the interest
interest rate.
rate.

AA point
point in
in time
time AA period
period in
in time
time
Cash
Cash flow
flow occur
occur in in aa point
point Cash
Cash flow
flow occur
occur inin aa period
period
i=10%

Years 0 1 2 3 4

Cash flow -$100 $30
0$20 -$10
1 $50
2 3 4
Checkpoint

Creating a Timeline

Suppose you lend a friend $10,000 today to help him finance a new Jimmy
John’s Sub Shop franchise and in return he promises to give you $12,155 at the
end of the fourth year. How can one represent this as a timeline? Note that the
interest rate is 5%.

Debashis Saha, Assistant Professor, F & B,

59
Jahangirnagar University
 Debashis Saha, Assistant Professor, F & B,
60
Jahangirnagar University
 Debashis Saha, Assistant Professor, F & B,
61
Jahangirnagar University
Compounding
and Discounting
Time
Timeline
lineshowing
showingcompounding
compoundingto
tofind
findfuture
futurevalue
valueand
anddiscounting
discountingto
to
find
findpresent
presentvalue
value

Debashis Saha, Assistant Professor, F & B,

62
Jahangirnagar University
Basic Patterns of Cash Flow

Single amount: A lump-sum amount either currently held or

expected at some future date. Examples include $1,000 today and
$650 to be received at the end of 10 years.

Annuity: A level periodic stream of cash flow. For our purposes, we’ll
work primarily with annual cash flows. Examples include either paying
out or receiving $800 at the end of each of the next 7 years.

Mixed stream: A stream of cash flow that is not an annuity; a stream

of unequal periodic cash flows that reflect no particular pattern.

Debashis Saha, Assistant Professor, F & B,

63
Jahangirnagar University
Future Values Of A
Single Amount
Future Values Of A Single Amount
Future
Future value
value determines
determines the
the amount
amount that that aa sum
sum of
of money
money
invested
invested today
today will
will grow
grow to
to in
in aa given
given period
period ofof time
time

The
The process
process of
of finding
finding aa future
future value
value isis called
called “compounding”
“compounding”
Formula
Formula == FV
FVtt ==CF
CF00 ** (1+r)
(1+r)tt OR
OR FV
FVtt == PV
PV ** (1+r)
(1+r)tt

FV
FV == $100
$100 ** (1+.1)
(1+.1)55== $161.05
$161.05
How
How much
much money
money
will
will you
you have
have inin 55 i = 10%
Years $100 ?
Years ifif you
you invest
invest
$100
$100 today
today at at aa
10%
10% rate
rate ofof return?
return? 0 1 2 3 4 5
Solve

Jane Farber places $800 in a savings account paying 6% interest compounded

annually. She wants to know how much money will be in the account at the end of 5
years.

Debashis Saha, Assistant Professor, F & B,

66
Jahangirnagar University
Present Values Of A
Single Amount
Present Values Of A Single Amount
Present
Present value
value calculations
calculations determine
determine what
what the
the value
value of
of aa cash
cash
flow
flow received
received in
in the
the future
future would
would be
be worth
worth today
today (time
(time 0)
0)

The
The process
process of
of finding
finding aa present
present value
value isis called
called “discounting”
“discounting”
Formula
Formula == PV
PV ==CF
CFtt // (1+r)
(1+r)tt OR
OR PV
PV == FV
FVtt// (1+r)
(1+r)tt
PV
PV == 100
100 // (1
(1 ++ .1)
.1)55== $62.09
$62.09
How
How much
much would
would
$100
$100 received
received fivefive i = 10%
years
years from
from now
now be be ? $100
worth
worth today
today ifif the
the
current
current interest
interest rate
rate
isis 10%? 0 1 2 3 4 5
10%?
Pam Valenti wishes to find the present value of $1,700 that will be received 8 years
from now. Pam’s opportunity cost is 8%.

Debashis Saha, Assistant Professor, F & B,

69
Jahangirnagar University
Interest Rate
At
At what
what rate
rate of
of interest
interest should
should we
we invest
invest our
our money
money today
today to
to get
get
aa desired
desired amount
amount of of money
money after
after aa certain
certain number
number of
of years?
years?
Simple
Simpleinterest:
interest:Interest
Interestisisearned
earnedonly
onlyon
onthe
theprincipal
principalamount
amount,,FV=PV(1+nr)
FV=PV(1+nr)

Compound
Compoundinterest:
interest:Interest
Interestisisearned
earnedononboth
boththe
theprincipal
principaland
and
accumulated
accumulatedinterest
interestof
ofprior
priorperiods,
periods,FV=PV(1+r)^n
FV=PV(1+r)^n
Jack
Jackand
andSarah
Sarahboth
bothopen
opensavings
savingsaccounts
accounts
with
withaastarting
startingbalance
balanceofof$1000.00
$1000.00on onthe
the
same
sameday.
day.Jack's
Jack'sbank
bankisispaying
payinghim
himusing
using
compounded
compoundedinterest,
interest,but
butSarah's
Sarah'sbank
bankisis
paying
payingher
herusing
usingsimple
simpleinterest.
interest.Both
BothJack
Jack
and
andSarah
Saraharearereceiving
receivingananinterest
interestrate
rateof
of
8%
8%annually.
annually.Who
Whodo doyou
youthink
thinkwill
willhave
havethe
the
larger
largerbalance
balanceininfive
fiveyears?
years? Debashis Saha, Assistant Professor, F & B,
70
Jahangirnagar University
Future Value Of An
Annuity
Future Value Of An Annuity
An
An annuity
annuity isis aa stream
stream of
of constant
constant cash
cash flow
flow occurring
occurring at
at
regular
regular interval
interval ofof times
times
annuity

Ordinary
OrdinaryAnnuity
Annuity When
When the
the cash
cashflows
flows occur
occurat
at the
the end
endof
of each
each period
period
When
When the
the cash
cashflows
flowsoccur
occurat
atthe
thebeginning
beginning of
ofeach
each
Annuity
Annuity Due
Due period
period

Formula
Formula == FVA
FVAtt ==AA ** [(1+r)
[(1+r)tt –1]/r,
–1]/r, FVIFA
FVIFAt=t= {[(1+r)
{[(1+r)tt –1]/r},
–1]/r},
Assume
Assume that
that Sally
Sally owns
owns an an
investment
investment that
that will
will pay
pay herher
$100 each year for 20 years. The FVA
FVA == $100
$100 ** {[(1+.15)
{[(1+.15) 20 –1]/.15
20
–1]/.15
$100 each year for 20 years. The 20
20
current
current interest
interest rate
rate isis 15%.
15%. =$10,244.36
=$10,244.36
What
What is
is the
the FV
FV of
of this
this annuity?
annuity? 72 Debashis Saha, Assistant Professor, F & B,
Jahangirnagar University
Ordinary Annuity
The future value of an annuity formula is used to calculate what the value at a future date
would be for a series of periodic payments.

The future value of an annuity formula assumes that

1. The rate does not change

2. The first payment is one period away

3. The periodic payment does not change

If the rate or periodic payment does change, then the sum of the future value of each individual
cash flow would need to be calculated to determine the future value of the annuity. If the first
cash flow, or payment, is made immediately, the future value of annuity due formula would be
used.
Debashis Saha, Assistant Professor, F & B,
73
Jahangirnagar University
Fran Abrams is choosing
which of two annuities to
receive. Both are 5-year,
$1,000 annuities; annuity A
is an ordinary annuity, and
annuity B is an annuity
due. To better understand
the difference between
these annuities, she has
listed their cash flows in
Table. Note that the
amount of each annuity
totals $5,000. The two
annuities differ in the
timing of their cash flows:
Debashis Saha, Assistant Professor, F & B,
74
Jahangirnagar University
Fran Abrams wishes to determine how much money she will have
at the end of 5 years if he chooses annuity A, the ordinary annuity.
It represents deposits of $1,000 annually, at the end of each of the
next 5 years, into a savings account paying 7% annual interest.
This situation is depicted on the following time line:

Debashis Saha, Assistant Professor, F & B,

75
Jahangirnagar University
 you invest $1,000 every year for the next five years, at 5% interest. This is how
much you would have at the end of the five-year period

Debashis Saha, Assistant Professor, F & B,

76
Jahangirnagar University
FV of Annuity Due
The future value of annuity due formula is used to calculate the ending value of a series of
payments or cash flows where the first payment is received immediately. The first cash flow
received immediately is what distinguishes an annuity due from an ordinary annuity. An
annuity due is sometimes referred to as an immediate annuity.

The future value of annuity due formula calculates the value at a future date. The use of the
future value of annuity due formula in real situations is different than that of the present
value for an annuity due. For example, suppose that an individual or company wants to buy
an annuity from someone and the first payment is received today. To calculate the price to
pay for this particular situation would require use of the present value of annuity due formula.
However, if an individual is wanting to calculate what their balance would be after saving for 5
years in an interest bearing account and they choose to put the first cash flow into the
account today, the future value of annuity due Debashis Saha, Assistant Professor, F & B,
77 would be used.
Jahangirnagar University
Fran Abrams wanted to choose between an ordinary annuity and an annuity due, both
offering similar terms except for the timing of cash flows. We calculated the future
value of the ordinary annuity in the example on page 164. We now will calculate the
future value of the annuity due, using the cash flows represented by annuity B

Debashis Saha, Assistant Professor, F & B,

78
Jahangirnagar University
Comparison of an Annuity Due
with an Ordinary Annuity Future Value

The future value of an annuity due is always greater than the future value of an
otherwise identical ordinary annuity. We can see this by comparing the future values at
the end of year 5 of Fran Abrams’s two annuities:

Ordinary annuity=$5,750.74 Annuity due=$6,153.29

Because the cash flow of the annuity due occurs at the beginning of the period rather
than at the end, its future value is greater. In the example, Fran would earn about $400
more with the annuity due.

Debashis Saha, Assistant Professor, F & B,

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Knowing what lies in store for You
 Suppose you have decided to deposits Tk 30,000 per year in your Public Provident
Fund Account for 30 years . What will be the accumulated amount in your Public
provident Account at the end of 30 years if the interest rate is 11 percent?

 FVAt = A * [(1+r)t –1]/r=30,000*(1.11^30-1)/.11 = 5,970,600

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How much should you save annually
  You want to buy a house after 5 years when it is expected to cost Tk 2 million. How
much should you save annually if your savings earn a compound return of 12%

 FVIFAt= {[(1+r)t –1]/r}=6.353

The annual saving should be

= 314,812

Debashis Saha, Assistant Professor, F & B,

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Present Value Of An
Annuity
Present Value Of An Annuity
The
Thepresent
presentvalue
valueofofan
anannuity
annuityisisthe
thecurrent
currentvalue
valueofoffuture
futurepayments
paymentsfrom
fromananannuity,
annuity,given
givenaa
specified
specifiedrate
rateof
ofreturn
returnor
ordiscount
discountrate.
rate.The
Theannuity's
annuity'sfuture
futurecash
cashflows
flowsare
arediscounted
discountedatatthe
the
discount
discountrate.
rate.Thus,
Thus,the
thehigher
higherthe
thediscount
discountrate,
rate,the
thelower
lowerthe
thepresent
presentvalue
valueof
ofthe
theannuity.
annuity.

Formula
Formula == PVA
PVAtt =A*
=A* [1-(1/1+r)
[1-(1/1+r)tt]/r,
]/r, PVIFA
PVIFAr,nr,n==[1-(1/1+r)t]/r
[1-(1/1+r)t]/r

Assume
Assume that
that Sally
Sally owns
owns an
an investment
investment that
that will
will pay
pay her
her $100
$100 each each
year
year for
for 20
20 years.
years. The
The current
current interest
interest rate
rate isis 15%.
15%. What
What isis the
the
PV
PV of
of this
this annuity?
annuity?

PVA
PVAtt==$100
$100 ** {1-(1/1+.15)
{1-(1/1+.15)2020]/.15}=$625.93
]/.15}=$625.93
 $1,000 payments made over a period of five years, here is how a present value
calculation would look. It shows that $4,329.58, invested at 5% interest, would be
sufficient to produce those five $1,000 payments.

Debashis Saha, Assistant Professor, F & B,

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The present value of ordinary annuity
The present value of ordinary annuity formula determines the value of a series of future
periodic payments at a given time. The present value of annuity formula relies on the concept
of time value of money, in that one dollar present day is worth more than that same dollar at a
future date.

The formula shown has assumptions, in that it must be an ordinary annuity. These assumptions
are that

1) The periodic payment does not change PV=

2) The rate does not change

3) The first payment is one period away

If the payment and/or rate changes, the calculation of the present value would need to be adjusted depending on the specifics.
If the payment increases at a specific rate, the present value of a growing annuity formula would be used.

If the first payment is not one period away, as the 3rd assumption requires, the present value of annuity due or present value of
deferred annuity may be used. An annuity due is an annuity that's initial payment is at the beginning of the annuity as opposed
to one period away. A deferred annuity pays the initial payment Debashis Saha, Assistant Professor, F & B,
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Present Value of Annuity Due

The formula for the present value of an annuity due, sometimes referred to as an
immediate annuity, is used to calculate a series of periodic payments, or cash flows,
that start immediately.

Formula:

PV=

Debashis Saha, Assistant Professor, F & B,

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How Much Can You Borrow For A Car
 After reviewing your budget, you have determined that you can afford to pay Tk
12,000 per month for 3 years toward a new car. You call afinance company and
learn that the going rate of interest on car finance is 1.5 % per month for 36
months. How much you can borrow ?
 PVIFA = [1-(1/1+r)t]/r = * [1-(1/1+.015)36]/.015=27.70

 PV= 12000*27.70= 332,400

Debashis Saha, Assistant Professor, F & B,

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Formulas
Future
FutureValues
Values Of
Of AA
Single FV
FVtt ==CF
CF00 **(1+r)
(1+r)tt OR
OR FV
FVtt== PV
PV**(1+r)
(1+r)tt
SingleAmount
Amount

Present
PresentValues
Values Of
Of
AASingle PV
PV==CF
CFtt//(1+r)
(1+r)tt OR
OR PV
PV== FV
FVtt//(1+r)
(1+r)tt
SingleAmount
Amount

Future
FutureValues
Values Of
Of FVA
FVAtt ==AA**{[(1+r)
{[(1+r)tt –1]/r},
–1]/r},FVIFA
FVIFAt=t= {[(1+r)
{[(1+r)tt ––
An
AnAnnuity
Annuity 1]/r},
1]/r},
Present
PresentValues
Values Of
Of
An
PVA
PVAtt =A*
=A* {[1-(1+r)
{[1-(1+r)-t-t]/r}
]/r}
AnAnnuity
Annuity

PV
PVof
of aaPerpetuity
Perpetuity P=
P=A.
A.PVIFA
PVIFAr,r,∝∝,,PVIFA=
PVIFA=1/r
1/r

Intra-year
Intra-yearCompounding
Compounding Debashis Saha, Assistant Professor, F
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 Debashis Saha, Assistant Professor, F & B,
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Jim Nance has been offered a future payment
of $500 three years from today. If his
opportunity cost is 7% compounded annually,
what value should he place on this opportunity
today?

Debashis Saha, Assistant Professor, F & B,

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 Debashis Saha, Assistant Professor, F & B,
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Frey Company, a shoe manufacturer, has been offered an opportunity to receive the
following mixed stream of cash flows over the next 5 years:

If the firm must earn at least 9% on its investments, what is the most it should pay for
this opportunity?
Debashis Saha, Assistant Professor, F & B,
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 Debashis Saha, Assistant Professor, F & B,
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The preceding examples calculated the amount that Fred
Moreno would have at the end of 2 years if he deposited
$100 at 8% interest compounded semiannually and
compounded quarterly.

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 Debashis Saha, Assistant Professor, F & B,
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 Shrell Industries, a cabinet manufacturer, expects to receive the following mixed
stream of cash flows over the next 5 years from one of its small customers. If Shrell
expects to earn 8% on its investments, how much will it accumulate by the end of
year 5 if it immediately invests these cash flows when they are received?

Debashis Saha, Assistant Professor, F & B,

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 Debashis Saha, Assistant Professor, F & B,
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Thank You

Debashis Saha, Assistant Professor, F & B,

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