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Topic 3 Report
Topic 3 Report
Topic 3 Report
For example, if the interest rate is 14%, then M.U, of 100 today
would be equivalent to M.U. of 114 one year from to day and
M.U. of 87.719 one year ago.
Ago
87.719
Today
87.719+(87.719x0.14)
= 99.99966
Future
100+(100x0.14)
=114
CONCEPT OF EQUIVALENCE
Example:
Plan No. 1: $2000 of loan principle plus 10% of principal
paid at the end of the year; interest paid at the end of each
year is reduced by $200. What is the economic equivalence in
four(4) repayment plans?
Year Amount Interest Total Money Principal Total End of
Owned at Accrued for Owned at End Payment Year Payment
Beginning of Years of Year
Year
Simple Interest
the total interest earned or charged is linearly
proportional to the initial amount of the loan, the
interest rate and the number of interest periods
Formula: I = Pin
I Interest
P Principal
i Interest
n number of
interest
Amount rate
period
SIMPLE INTEREST
Sample Problem:
$2,000 is deposited in a savings
account that pays 10% simple
interest. How much will the
account be worth in 5 years?
SIMPLE INTEREST
Given:
P = $2000 i=10% n=5
Formula:
Solution:
SIMPLE INTEREST
Sample Problem:
On May 30, 2012, a businessman
loans $15000 in the bank for the
expansion of his restaurant. It was
agreed that he will pay the amount
of 6% rate of interest on August
10, 2012. What is the ordinary
simple interest to be paid?
SIMPLE INTEREST
Given:
P = $15000 i=6% n=?
Formula:
Solution:
Since May 30 is the beginning date, it is not
included in counting.
Total number of days = 72
SIMPLE INTEREST
Continuation:
Sample Problem:
Louie borrowed $1800 from his
aunt last December 25, 2010. He
promised that he will pay his aunt
on February 14, 2011 at 8%
interest. Find the exact simple
interest to be paid by Louie.
EXACT SIMPLE INTEREST
Given:
P = $1800 i=8% n=?
Formula:
Solution:
Total number of days = 51
EXACT SIMPLE INTEREST
Continuation:
Compound Interest
interest accrued is calculated on the principal plus the
total amount of interest accumulated in the previous
periods
Formula:
COMPOUND INTEREST
Sample Problem:
An investment earns 3%
compounded annually. Find the
value of an initial investment of
$5000 after 6 years.
COMPOUND INTEREST
Given:
P = $5000 i=
Formula:
Solution:
RATE OF INTEREST
i rate of
interest per
r nominal
m number of
compounding
interest interest rate periods per
period year
RATE OF INTEREST
Sample Problem:
A credit card company charges
21% interest per year,
compounded monthly. What
effective annual interest rate does
the company charge?
RATE OF INTEREST
Given:
m=12 r=21%
Formula:
Solution:
• Example:
Given:
If money is worth 12% compounded semi-annually
j= 12% = 0.12
m=2
Solution : payment/s = obligation/s
x = P 20 000 (1+0.12) *4 + P 30 000 (1+0.12) *-2
= P 25 249.54 + P 26 699.89
= P 51 949.43
CONTINUOUS COMPOUNDING AND
DISCRETE PAYMENTS.
• Sample
• Given
P= 50,000 r= 7.5% / 0.075 n= 10
Formula:
F= Pe*rn
F=(50,000.00)*(0.075)(10)
F= Php 105,850.00
b. compounded annually
Formula:
F= P(1+n)*n
F= 50,000(1+0.075)
F= Php 103,051.5781
DISCOUNT
Discount
- A discount is the reduction of either the
monetary amount or a percentage of the
normal selling price of a product or
service. For example, a discount of $10
may be offered from the list price of a
product, or as a 10% discount from the list
price.
DISCOUNT
Procedure
- The rate is usually given as a percent.
- To find the discount, multiply the rate by
the original price.
- To find the sale price, subtract the
discount from original price.
DISCOUNT
Example Problem 1:
In a video store, a DVD that sells for
$15 is marked "10% off." What is
the discount? What is the sale price
of the DVD?
DISCOUNT
Given: Solution:
Original Price - $15.00 x .10 = $1.5
$15.00 $15.00 - $1.5 = $13.5
Discount – 10% off
The discount is $1.50
Sale Price - ?
and the sale price is
$13.50.
DISCOUNT
Example Problem 2:
- Mr. J Dela Cruz borrowed money from a
bank. He received P1,342 from the bank
promises to pay P1,500 at the end of 9
months. Determine the simple interest and
the corresponding discount rate or often
offered to as the "Banker's discount."
DISCOUNT
Given: Solution:
Discount - P1500 - d = discount/principal
P1342 = 158/1500 = 0.1053
Discount - P158 or 10.53%
Principal – P1500 i = d/1-d = 0.1053/1 –
0.1053 = 0.1177 or
11.77%
Required:
d – rate of discount
i – rate of interest
INFLATION
Formula:
FC = PC(1+f)^n
F = P/(1+f)^n
F = P(1+i/1+f)^n
INFLATION
Example Problem:
A man invested P130,000 at an
interest rate of 10% compounded anually.
What will be the final amount of his
investment, in terms of today’s peso after
5 years, if inflation remains the same at
the rate of 8% per year?
INFLATION
Given: Formula:
P = P130,000 F = P (1+i/1+f)^n
i = 0.10
Solution
n = 5 years = 130000
f = 0.08 (1+.10/1+0.08)^5
= 130000 (1.10/1.08)^5
= P142,491
INFLATION
Problem:
What is the uninflated present
worth of a P200,000 future value in two
years if the average inflation rate is 6%
and interest rate is 10%.
INFLATION
Given: Formula:
F = 200,000
P=? P = F/(1+icf)^n
f = 0.06 Solution:
i = 0.10
n = 2 years P = 200000/(icf)^2
icf = 0.10 + 0.06 + (0.10)(0.06)
icf = 0.166
P = 200000/(0.166)^2
P = P147,107
ANNUITIES
Annuity
• a series of equal
payments made at
equal intervals of time.
ELEMENTS OF ANNUITY
a) Ordinary Annuity
the equal payments are made at the end of each
compounding period starting from the first
compounding period.
ORDINARY ANNUITY
ORDINARY ANNUITY
Value of A, if P is known
Sample Problem:
For having been loyal, trustworthy and efficient, the
company has offered a supervisor a yearly gratuity
pay of P20,000.00 for 10 years with the first payment
to be made one year after his retirement. The
supervisor, instead, requested that he be paid a lump
sum on the date of his retirement less interest that
the company would have earned if the gratuity is to
be paid on yearly basis. If interest is 15%, what is the
equivalent lump sum that he could get?
ORDINARY ANNUITY
Given:
A= Php 20000 i=15% n=10
Formula:
Solution:
b) Deferred Annuity
is also an ordinary annuity but the payment of the
first amount is deferred a certain number periods
after the first
DEFERRED ANNUITY
DEFERRED ANNUITY
Sample Problem:
A man pays P15,000 annually starting at the end
of the 5th year until at the end of the 10th year.
P20,000 at the end of the 11th year until at the
end of the 15th year. P35,000 annually for the
succeeding 5 years. With 10% compounding
annually, what annual payment should he pay
for 20 years to settle the amount equally?
DEFERRED ANNUITY
Given:
Formula:
DEFERRED ANNUITY
Solution:
DEFERRED ANNUITY
Continuation:
TYPES OF ANNUITY
c) Annuity due
the equal payments are made at the beginning of
each compounding period starting from the first
period. The diagram below shows the cash flow in
annuity due.
ANNUITY DUE
ANNUITY DUE
Sample Problem:
A farmer bought a tractor costing P12,000 if paid
in cash. The tractor may also be purchased by
installment to be paid within 5 years. Money is
worth 8% compounded annually. Determine the
amount of each annual payment if all payments
are made
a) at the end of each of the 5 years
b) at the beginning of each of the 5 years
ANNUITY DUE
Formula:
Solution:
ANNUITY DUE
Formula:
Solution:
TYPES OF ANNUITY
When , Thus,
ANNUITY DUE
Sample Problem:
Company “Rich” pays $2 in dividends annually
and estimates that they will pay the dividends
indefinitely. How much are investors willing to
pay for the dividend with a required rate of return
of 5%?
ANNUITY DUE
Given:
Formula:
Solution:
Formula:
Solution:
CAPITALIZED COST
Capitalized Cost
Sample Problems
1. A manufacturing plant installed a new boiler at a total cost of
P150,000 and is estimated to have a useful life for 10 years. It is estimated
to have a scrap value at the end of its useful life of P5,000. If interest is
12% compounded annually, determine its capitalized cost.
2. A heat exchanger is needed in a chemical process. If interest is 9%
compounded annually, determine which of the following heat exchanger is
cheaper by comparing the capitalized costs:
Exchanger A costs P22,000 with a scap value of P1,000 and a useful life
for 7 years;
Exchanger B costs P28,000 with a scap value of P1,500 and a useful life
of 10 years.
CAPITALIZED COST
SOLUTIONS:
1.Given:
Co= P150,000
S= P5,000
I= 12% or 0.12
K= 10yrs.
Cc=Co + Cc=152,374.3402
Cc=150,000 +
CAPITALIZED COST
SOLUTIONS:
2)A.Given:
Co= P22,000
S= P1,000
I= 9% or 0.9
K= 7 yrs.
Cc=Co + Cc=22,011.31386
Cc=22,000 +
CAPITALIZED COST
SOLUTIONS:
2)B.Given:
Co= P28,000
S= P1,500
I= 9% or 0.9
K= 10 yrs.
Cc=Co + Cc=28,002.4465
Cc=28,000 +
CAPITALIZED COST
SOLUTIONS:
SOLUTIONS:
3. Given:
Co= P5,000,000
S= P25,000
Rc=100,000
I= 8% or 0.08
K=5
Cc=Co + + Cc=5,525,570
Cc=5,000,000+ +
AMORTIZATION
Amortization
- Amortization is paying off a debt over
time in equal installments. Part of each
payment goes toward the loan principal,
and part goes toward interest. As the loan
amortizes, the amount going toward
principal starts out small, and gradually
grows larger month by month.
AMORTIZATION
Amortization Schedule
- An amortization schedule is a table that
provides the details of the periodic
payments for an amortizing loan. The
principal of an amortizing loan is paid
down over the life of the loan. Typically,
an equal amount of payment is made
every period.
AMORTIZATION
Example Problem:
Consider a $30,000 fully amortizing loan
with a term of five years and a fixed
interest rate of 6%. Payments are made
on a monthly basis.
AMORTIZATION
• Formula
UNIFORM ARITHMETIC GRADIENT
• Sample:
• Diagram
UNIFORM ARITHMETIC GRADIENT
• Given
Formula:
Convert interest rate: j = 6% yearly
compounded quarterly
(1 + i)*m = ( 1 + j/m)*m
(1+i)*12 = ( 1+ 0.6/4)*4
Solution:
FM = F5k+ F500 P(1+i)*5 = A [(1+i)*n-1 /
i] + G/i [(1+i)*n -1 / i - n] M(1+0.005)*5=
5000 [(1+0.005*5 -1 / 0.005 - 5 +
200/0.005 [1+0.005*5 -1/ 0.005 – 5]
M= Php 26,589.00
CONCLUSION
1. Determine the exact simple interest on P500 for the period from January 10
to October 28, 1996 at 16% interest.
2. The sum of P10, 000 was deposited to a fund earning interest 10% per
annum compounded quarterly, what was the principal in the fund at the end
of a year?
3. A man bought a lot worth P1000,000 if paid in cash. On the installment
basis, he paid a down payment of P20,000; P300, at the end of one year,
P400, at the end of three years and a final payment at the end of five years.
What was the final payment if interest was 20%?
4. Compare the accumulated amounts after 5 years of P1,000 invested at the
rate of 10% per year compounded (a) annually, (b) semiannually, (c)
quarterly, (d) monthly, I daily, and (f) continuously.
5. A man borrowed P5,000 from a bank and agreed to pay the loan at the end
of 9 months. The bank discounted the loan and gave him P4,000 in cash.
(a) What was the rate of discount? (b) What was the rate of interest? (c)
What was the rate of interest for one year?
ASSESSMENT
6. What are the present worth and the accumulated amount of a 10-year
annuity paying P10,000 at the end of each year, with interest at 15%
compounded annually?The sum of P10, 000 was deposited to a fund
earning interest 10% per annum compounded quarterly, what was the
principal in the fund at the end of a year?
7. On the day his grandson was born, a man deposited to a trust
company a sufficient amount of money so that the boy could receive
five annual payments of P80,000 each for his college tuition fees,
starting with his 18th birthday. Interest at the rate 12% per annum was
to be paid on all amounts on deposit. There was also a provision that
the grandson could select to withdraw no annual payments and
received a single lump amount on his 25th birthday. The grandson
chose this option.
(a)How much did the boy received as the single payments?
(b)How much did the grandfather deposit?
ASSESSMENT
REFERENCES
Thank
you!!!