Cash Flow

A cash flow is a term that refers to payments

received(cash inflows) or payments or deposits
made(cash outflows).

DEPARTMENT OF EDUCATION
 Cash Flow

The fair market value (FMV) 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.

DEPARTMENT OF EDUCATION
 Cash Flow
Mr. Cruz received two offers on a lot that he wants to sell.
Mr. A has offered P50,000 and one million lump sum
payment 5 years from now. Mr. B 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 bigger. market value?
Focal Date is the start of the term.
Fair Market Value (FMV) = (down payment) + (present value)
Mr. A(FMV) = Mr. B(FMV) =
DEPARTMENT OF EDUCATION
 Cash Flow
Mr. A has offered P50,000 and one million lump sum
payment 5 years from now. (Money can earn 5% compounded
annually.)
-n
P  F (1  i)

DEPARTMENT OF EDUCATION
 Cash Flow
Mr. B has offered P50,000 plus P40,000 every quarter for five
years. (money can earn 5% compounded annually.)
Step 1: Compute for the equivalent rate.
5% compounded annually = ____ compounded quarterly
i= 0.012272
.

DEPARTMENT OF EDUCATION
 Cash Flow
Mr. B has offered P50,000 plus P40,000 every quarter for five
years. (money can earn 5% compounded annually.)
Step 2: Apply the formula for finding the present value of
ordinary annuity.
1  (1  i) -n
PA
i
A= 40,000 .
i= 0.012272 or 1.2272%
n= 4(5)=20

DEPARTMENT OF EDUCATION
 Cash Flow
Mr. Cruz received two offers on a lot that he wants to sell.
Mr. A has offered P50,000 and one million lump sum
payment 5 years from now. Mr. B 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 bigger
. market value?
Fair Market Value (FMV) = (down payment) + (present value)
Mr. A(FMV) = 833, 526.17
Mr. B(FMV) = 755, 572.68 Mr. A has the higher offer.
DEPARTMENT OF EDUCATION
 Cash Flow: Evaluation
Company A offers P150,000 at the end of 3 years plus
P300,000 at the end 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?
Hints: Company. B offer:
Company A offer: 8% compounded annually = ____
Solve for P1 and P2. compounded quarterly
Where F1 = 150,000 and F2=300,000
m=2 (two payments) and t=5 years
DEPARTMENT OF EDUCATION
 Deferred Annuity
Iya, who is celebrating her 17th birthday today, does
not want an extravagant party for her 18th birthday.
Instead, she asks her parents if she could receive P500
pesos per month until her 21st birthday. Iya’s mom
decided to save today so that she can provide extra
allowance every month after Iya’s 18th birthday. But
.

how much should the mother save today so that she

will have 500 every month for 3 years which is due 1
year from now?
DEPARTMENT OF EDUCATION
 Deferred Annuity
This situation represents a Deferred Annuity.

Deferred annuities are series of payments that

will start on a later date. .

DEPARTMENT OF EDUCATION
 Deferred Annuity
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.

DEPARTMENT OF EDUCATION
 Examples of Deferred Annuity

>A credit card company offering its clients

to purchase today but to start paying
monthly with their choice of term after 3
months. .

DEPARTMENT OF EDUCATION
 Examples of Deferred Annuity

>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.
.

DEPARTMENT OF EDUCATION
 Examples of Deferred Annuity

>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.

DEPARTMENT OF EDUCATION
 Present Value of Deferred Annuity
•  

DEPARTMENT OF EDUCATION
 Present Value of Deferred Annuity
On his 40th birthday, Mr. A decided to buy a pension plan
for himself. This plan will allow him to claim P10,000
quarterly for 5 years starting 3 months after his 60th
birthday. What one-time payment should he make on his
40th birthday to pay off this pension plan, if the interest
rate is 8% compounded quarterly?.

A= 10,000 n=(m)(t)=4(5) =20

i= 0.08 k=(m)(t)= 4(20) =80
DEPARTMENT OF EDUCATION
 Present Value of Deferred Annuity
•  
( m)
i
m

20

DEPARTMENT OF EDUCATION
 Evaluation: Present Value of Deferred Annuity
A credit card company offers a deferred payment
option for the purchase of any appliance. Rose plans to
buy a smart 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?
.

DEPARTMENT OF EDUCATION
 Evaluation: Present Value of Deferred Annuity
Find the present value of a 3-year deferred annuity
with regular payments of P10,000 compounded semi-
annually at an interest rate of 3% for 9 years.

DEPARTMENT OF EDUCATION