PRESENT VALUE

MATHEMATICS OF
ANNUITIES
[ ( )
]
− 𝑚𝑡
𝑖
1− 1+
(
𝑃=𝑅 1+
𝑖
𝑚 ) 𝑖
𝑚

[ ( )
]
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑃=𝑅
𝑖
𝑚
PRESENT VALUE
MATHEMATICS OF
ANNUITIES
[ ( )
]
− 𝑚𝑡
𝑖
1− 1+
(
𝑃=𝑅 1+
𝑖
𝑚 ) 𝑖
𝑚

[ ( )
]
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑃=𝑅
𝑖
𝑚
PRESENT VALUE
MATHEMATICS OF
ANNUITIES
[ ( )
]
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑃=𝑅
𝑖
𝑚

[ ( )
]
− 𝑚𝑡
𝑖
1− 1+
(
𝑃=𝑅 1+
𝑖
𝑚 ) 𝑖
𝑚

𝑚
Present Value of Ordinary Annuity

[ ( )
]
−𝑚𝑡
𝑖
1 − 1+
𝑚
𝑃=𝑅
𝑖
𝑚
where
P – present value
R – regular payments
i – nominal interest rate
m – compounding period
t – time in terms of years
Example 1
Find the present value of an ordinary annuity with
regular monthly payments worth P1,000 at 3%
annual interest rate compounded quarterly at the end
of 4 years. How much is the interest?
Given:

[ ]
R = 1000
( )
−𝑚𝑡
𝑖
1 − 1+
t = 4 years 𝑚
𝑃=𝑅
i = 3% or 0.03 𝑖
m=4 𝑚
P=?
Continuation:

[ ( )
]
−𝑚𝑡
𝑖
R = 1000 1 − 1+
𝑚
t = 4 years 𝑃=𝑅
𝑖
i = 3% or 0.03 𝑚

[ ]
m=4
( )
−( 4 )( 4 )
0.03
1− 1+
4
𝑃 =1000
0.03
4

𝑃=Php 15,024.31
Continuation:
R = 1000 𝐼 = 𝑅𝑡𝑚 − 𝑃
t = 4 years
i = 3% or 0.03
m=4 𝐼 =16,000 − 15,024.31
P = 15,024.31
𝐼 = Php 975.69
Present Value of Annuity-Due

[ ( )
]
−𝑚𝑡
𝑖
1− 1+
𝑃=𝑅 1+
𝑖
𝑚 ( ) 𝑖
𝑚

𝑚
where
P – present value
R – regular payments
i – nominal interest rate
m – compounding period
t – time in terms of years
Example 2
Find the present value of an annuity-due with
regular monthly payments worth P2,500 at 6%
interest rate compounded monthly at the end of one
and a half year. How much is the interest?
Given:
R = 2500

[ ( )
]
−𝑚𝑡
t = 1.5 years 𝑖
1− 1+
i = 6% or 0.06
m = 12
(
𝑃 = 𝑅 1+ )
𝑚
𝑖
𝑖
𝑚

𝑚
P=?
Continuation:

[ ( )
]
−𝑚𝑡
𝑖
R = 2500 1− 1+
t = 1.5 years 𝑃 = 𝑅 ( 1+
𝑖
𝑚 ) 𝑖
𝑚

i = 6% or 0.06 𝑚

[ ]
m = 12
( )
−(12) (1.5 )
006
1 − 1+
𝑃 =2500 1+ (
0.06
12 ) 12
0.06
12

𝑃 =(2512.5 )(17.17276802)
𝑃=Php 43,146.58
Continuation:
R = 2500 𝐼 = 𝑅𝑡𝑚 − 𝑃
t = 1.5 years
i = 6% or 0.06
m = 12 𝐼 = 45 ,000 − 43,146.58
P = 43,146.58
𝐼 =Php 1,853.42
Example 3
A certain fund currently has P100,000 and is
invested at 3% interest compounded annually. How
much withdrawal can be made at the beginning of
each year so that the fund will have zero balance at
the end of 12 years?
Given: 𝑃

[ ]
𝑅=
P = 100,000
( )
−𝑚𝑡
𝑖
t = 12 years 1− 1+
i = 3% or 0.03 ( 1+
𝑚
𝑖
) 𝑖
𝑚

m=1 𝑚
Continuation: 𝑅 = 𝑃

[ ( )
]
−𝑚𝑡
P = 100,000 𝑖
1− 1+
t = 12 years
i = 3% or 0.03
( 1+
𝑖
𝑚 ) 𝑖
𝑚

𝑚
m=1
100,000

[ ]
𝑅=

( )
−(1) (12)
0.03
1 − 1+
( 1+
0.03
1 ) 1
0.03
1

𝑅= Php 9,753.60
Practice Exercises
1. Find the present value of the following:
a. an ordinary annuity with P2,000 regular payment
at 3% compounded semi-annually for 3 years
b. an ordinary annuity with P500 regular payment
at 2% compounded quarterly for two years
c. an annuity-due with P1,000 regular payment at
3% compounded monthly for 4 years
d. an annuity-due of P2,000 regular payment at 2%
compounded quarterly for 5 years
Practice Exercises
2. In order to make equal withdrawals worth P5,000
at the end of every month for the next 12 months,
how much should be deposited into an account
providing 2.7% interest rate compounded monthly?
3. You buy a new computer worth P25,000 today to
pay at the end of every month for 2 years at 3%
interest compounded monthly. How much are your
monthly payments? How much total interest will you
have to pay in 2 years?
Answers:
1. a) Php 11,394.37; b) Php 3,911.48
c) Php 45,291.64; d) Php 38,164.71
2. P = Php 59,131.64
3. R = Php 1074.53, I = Php 788.72