Fair Market

Value of
Cash Flow
QUARTER 2 – MODULE 5

Group 3
At the end of this presentation,
you will be able to calculate the
fair market value of a cash flow
stream that includes an annuity.

Objective
Vocabulary
 PRESENT VALUE
- of an annuity is the amount of money today plus incurred interest that is payable within time period
through regular and equal payments.

where:

𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 ;

𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 payments 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑝 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑎𝑑𝑒
𝑖𝑛 𝑎 𝑦𝑒𝑎r
Vocabulary
The value of money today or present value of a lump sum or one-time payment can be computed
using the formula:

where: 𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑜𝑛𝑒 − 𝑡𝑖𝑚𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑛 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 (𝑚) 𝑡𝑖𝑚𝑒𝑠 𝑦𝑒𝑎𝑟𝑠 (𝑡)
Vocabulary
 FUTURE VALUE
- of an annuity is the sum of future values of all payments to be made during the entire term of the
annuity.

where:

𝐹𝑉 = 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢e 𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 ;

𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 payments 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑟𝑒𝑔𝑢𝑙𝑎𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 𝑝 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑚𝑎𝑑𝑒
𝑖𝑛 𝑎 𝑦𝑒𝑎r
Vocabulary
The value of money after a certain period of time or future value of a lump sum or one-time
payment can be computed using the formula: :

where: 𝐹𝑉 = 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢e 𝑅 = 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑜𝑛𝑒 − 𝑡𝑖𝑚𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝑗 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑝𝑒𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑛 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 ( 𝑚) 𝑡𝑖𝑚𝑒𝑠 𝑦𝑒𝑎𝑟𝑠 ( 𝑡)
Vocabulary
 CASH FLOW
- is a term that refers to payments received (cash inflows) or payments or deposit made (cash outflows)
- Cash inflows can be represented by positive numbers and cash outflows can be represented by
negative numbers.

 FAIR MARKET VALUE/ECONOMIC VALUE

- of 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 the focal date.
 Illustrative Fair market value at the START
of the term:
- Neil Arstrong
Example 1. First payment scheme: Since the focal date is at the
JRV Motorcycle Store offers two payment beginning of the term (today) or 𝑡 = 0, then the present
schemes for their top of the line value of ₱50,000 down payment is still ₱50,000 at 5%
motorcycle. The first scheme offers a
interest rate compounded annually. To convince you,
₱50,000 down payment and a lump sum
payment of ₱200.000 after 4 years while let’s have a computation.
the second payment scheme offers Given: 𝑅 = 50,000 𝑡=0 𝑟 = 0.05 𝑛 = 𝑚𝑡 = 1(0) = 0
₱40,000 down payment and P26,250 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓
every six months for four years. Find the 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟(𝑚) = 1
fair market value of each scheme at the j = = 0.05
start and end of the payment term if the Solution:
interest rate is 5% compounded annually. Let be the present value of the ₱50,000 down payment. The
First payment scheme Second payment
scheme
formula for the present value of one-time payment is =.
= ⥤ = ⥤ = 50,000
₱50,000 down payment ₱40,000 down payment

₱200,000 after 4 years ₱26,250 every six

months for 4 years
 Illustrative To determine the present value of lump sum payment of
P200,000 payable after 4 years:
-N
Example 1. Given: 𝑅 = 200,000 𝑡=4 𝑟 = 0.05
JRV Motorcycle Store offers two payment 𝑛 = 𝑚𝑡 = 1(4) = 4
schemes for their top of the line 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟(𝑚) = 1
motorcycle. The first scheme offers a j = = 0.05
₱50,000 down payment and a lump sum
payment of ₱200.000 after 4 years while Solution:
the second payment scheme offers Let be the present value of lump sum payment of ₱200,000
₱40,000 down payment and P26,250 payable after 4 years.
every six months for four years. Find the = ⥤ = ⥤ = 164,540.49
fair market value of each scheme at the
start and end of the payment term if the
interest rate is 5% compounded annually. Therefore, the fair market value of the first payment
First payment scheme Second payment scheme at the beginning of the term is:
scheme
FMV = +
₱50,000 down payment ₱40,000 down payment
FMV = 50,000 + 164,540.49
FMV = 214,540.49
₱200,000 after 4 years ₱26,250 every six
months for 4 years
 Second payment scheme: Just like the first, since the
Illustrative focal date is at the beginning of the term (today) or 𝑡 =
- the present value of ₱40,000 down payment is
Example 1. 0, then
still P40,000.
JRV Motorcycle Store offers two payment Given: 𝑅 = 40,000 𝑛 = 𝑚𝑡 = 1(0) = 0 j = = 0.05
schemes for their top of the line
motorcycle. The first scheme offers a Solution:
₱50,000 down payment and a lump sum Let be the present value of the ₱40,000 down payment.
payment of ₱200.000 after 4 years while = ⥤ = ⥤ = 40,000
the second payment scheme offers
₱40,000 down payment and P26,250 To determine the present value of an annuity with regular payment
every six months for four years. Find the of ₱26,250 every six months for 4 years at 5% interest
fair market value of each scheme at the compounded annually we shall use the Present Value formula for
start and end of the payment term if the regular payments.
interest rate is 5% compounded annually. =
First payment scheme Second payment But since the payment interval is not equal to interest interval, let
scheme us first convert the interest interval per time period 𝒋 to the
₱50,000 down payment ₱40,000 down payment appropriate rate.
j = - 1 ⥤ j = - 1 ⥤ 0.02470
₱200,000 after 4 years ₱26,250 every six
months for 4 years
 Illustrative
Example 1.
JRV Motorcycle Store offers two payment
schemes for their top of the line
motorcycle. The first scheme offers a
₱50,000 down payment and a lump sum
payment of ₱200.000 after 4 years while
the second payment scheme offers
₱40,000 down payment and P26,250
every six months for four years. Find the
fair market value of each scheme at the
start and end of the payment term if the
interest rate is 5% compounded annually.
First payment scheme Second payment
scheme
₱50,000 down payment ₱40,000 down payment
₱200,000 after 4 years ₱26,250 every six
months for 4 years
Let the present value of ₱26,250 regular payment
every 6 months or twice (2) a year.
-
Given: 𝑅 = 26,250 𝑛 = (p)(𝑡) = 2(4) = 8
𝑛𝑜. 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 (𝑝) 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 2
𝑡=4
Solution:
= ⥤ = ⥤ =
188,457.09
Therefore, the fair market value of the first payment
scheme at the beginning of the term is:
FMV = +
FMV = 40,000 + 188,457.09
FMV = 228,457.09
Thus, the second payment scheme has a greater fair market
value at the beginning of the payment term.
The difference between fair market value of the
second and first payment schemes is:
228,457.09 - 214,540.49 = 13,917.00
 Illustrative
Example 1.
JRV Motorcycle Store offers two payment
schemes for their top of the line
motorcycle. The first scheme offers a
₱50,000 down payment and a lump sum
payment of ₱200.000 after 4 years while
the second payment scheme offers
₱40,000 down payment and P26,250
every six months for four years. Find the
fair market value of each scheme at the
start and end of the payment term if the
interest rate is 5% compounded annually.
First payment scheme Second payment
scheme
₱50,000 down payment ₱40,000 down payment
Fair market value at the END
of the term:
- Neil Arstrong
First payment scheme: Since the focal date is at the
end of the term (4 years from now) or 𝑡 = 4 then, the
future value of ₱50,000 down payment can be
calculated using the future value formula for one-time
payment.
=
Given: 𝑅 = 50,000 𝑛 = 𝑚𝑡 = 1(4) = 4 j = = 0.05
Solution:
Let be the future value of the ₱50,000 down payment after 4 years
at 5% interest rate compounded annually.
= ⥤ = ⥤ = 60,775.31
The future value of ₱200.000 is still ₱200,000 because the payment is to
be done 4 years from now. Therefore, the fair market value of the first
payment scheme at the END of the term is:

₱200,000 after 4 years ₱26,250 every six FMV = 60,775.31 + 200,000

months for 4 years FMV = 260,775.31
 Illustrative
Example 1. Second payment scheme: Since the focal date is at the
end of the term (4 years from now) or 𝑡 = 4 then, the
JRV Motorcycle Store offers two payment
schemes for their top of the line future value of ₱40,000 down payment can be
motorcycle. The first scheme offers a calculated using the future value formula for one-time
₱50,000 down payment and a lump sum payment =
payment of ₱200.000 after 4 years while
the second payment scheme offers Given: 𝑅 = 50,000 𝑛 = 𝑚𝑡 = 1(4) = 4 j = = 0.05
₱40,000 down payment and P26,250
every six months for four years. Find the
fair market value of each scheme at the Solution:
start and end of the payment term if the = ⥤ = ⥤ = 48,620.25
interest rate is 5% compounded annually.
First payment scheme Second payment
scheme
₱50,000 down payment ₱40,000 down payment

₱200,000 after 4 years ₱26,250 every six

months for 4 years
 Illustrative
Example 1.
JRV Motorcycle Store offers two payment
schemes for their top of the line
motorcycle. The first scheme offers a
₱50,000 down payment and a lump sum
payment of ₱200.000 after 4 years while
the second payment scheme offers
₱40,000 down payment and P26,250
every six months for four years. Find the
fair market value of each scheme at the
start and end of the payment term if the
interest rate is 5% compounded annually.
First payment scheme Second payment
scheme
₱50,000 down payment ₱40,000 down payment
₱200,000 after 4 years ₱26,250 every six
months for 4 years
Let us determine the future value of an annuity with
regular payment of ₱26,250 every six months for 4
years at 5% interest compounded annually using the
formula:
FV = R[]
Given: 𝑅 = 26,250 𝑛 = (p)(𝑡) = 2(4) = 8 𝑡 = 4 years
𝑛𝑜. 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 (𝑝) 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 2 r = 0.05 𝑚
=1
The appropriate interest rate was previously converted as 𝑗 = 0.02470,
since the number of payments (p) per year is not equal to interest interval
(m).
Solution:
Let be the future value of the ₱26,250 annuity every 6 months for
4 years at 5% interest compounded annually.
= R[] ⥤ = 26,250[] ⥤ = 229,079.58
 Illustrative
Example 1. The fair market value of the second payment scheme
JRV Motorcycle Store offers two payment at the END of the term is:
schemes for their top of the line
motorcycle. The first scheme offers a
FMV = 48,620.25 + 229,079.58
₱50,000 down payment and a lump sum
FMV = 277,699.83
payment of ₱200.000 after 4 years while
the second payment scheme offers
₱40,000 down payment and P26,250 Still the second payment scheme has greater fair
every six months for four years. Find the market value. Therefore, it is advisable to
fair market value of each scheme at the choose the first payment scheme if you are
start and end of the payment term if the going to buy that top of the line motorcycle that
interest rate is 5% compounded annually.
First payment scheme Second payment is, if you have ₱200,000 available fund after 4
scheme years.
₱50,000 down payment ₱40,000 down payment

₱200,000 after 4 years ₱26,250 every six

months for 4 years
 Illustrative
Example 2. -

A land owner plans to sell his estate. Two

Fair market value of Mr.
individuals expressed their intent to buy the Velasco’s offer:
said estate. Mr. Velasco offered 1.5 million
pesos payable after 6 months and 2 million
pesos after 2 years while Mrs. Abengoza
Compute the present value of ₱1.5 million payable
offered a down payment of ₱500,000 plus after 6 months with interest rate of 8% compounded
Php375,000 every end of 3 months for 2 semi-annually.
years. Suppose the money is earning 8%
compounded semi-annually, which offer has a
better market value? If the focal date is today
Given: 𝑅 = 1,500,000 𝑡 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝑜𝑟 0.5 𝑦𝑒𝑎𝑟𝑠 𝑟 = 0.08
then, compute the present value of each offer. 𝑛 = 𝑚𝑡 = (2)(0.5) = 1 j = = 0.04 𝑚=2
Mr. Velasco’s offer Mr. Abengoza’s offer
1.5 million after 6 ₱500,000 down Solution:
months payment = ⥤ = ⥤ = 1,442,307.69
2 million after two years ₱375,000 quarterly for
2 years

If the focal date is today then, compute the

present value of each offer.
 Illustrative
Example 2. -

A land owner plans to sell his estate. Two Compute the present value of ₱2 million payable after
individuals expressed their intent to buy the 2 years with interest rate of 8% compounded semi-
said estate. Mr. Velasco offered 1.5 million annually.
pesos payable after 6 months and 2 million
pesos after 2 years while Mrs. Abengoza Given: 𝑅 = 2,000,000 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠 𝑟 = 0.08 𝑛
offered a down payment of ₱500,000 plus = 𝑚𝑡 = (2)(2) = 4 j = = 0.04 𝑚=2
Php375,000 every end of 3 months for 2
years. Suppose the money is earning 8%
compounded semi-annually, which offer has a Solution:
better market value? If the focal date is today = ⥤ = ⥤ = 1,709,608.38
then, compute the present value of each offer.
Mr. Velasco’s offer Mr. Abengoza’s offer
FMV = +
1.5 million after 6 ₱500,000 down
months payment FMV = 1,442,307.69 + 1,709,608.38
FMV = 3,151,916.07
2 million after two years ₱375,000 quarterly for
2 years

If the focal date is today then, compute the

present value of each offer.
 Illustrative
Example 2. Fair
- market value of Mrs.

A land owner plans to sell his estate. Two Abengoza’s offer:

individuals expressed their intent to buy the
said estate. Mr. Velasco offered 1.5 million The present value of ₱500,000 down payment is still
pesos payable after 6 months and 2 million ₱500,000 since 𝑡 = 0. Obviously, the
pesos after 2 years while Mrs. Abengoza
offered a down payment of ₱500,000 plus
present value of a down payment is P500,000 because
Php375,000 every end of 3 months for 2 the payment will be made at 𝑡 = 0.
years. Suppose the money is earning 8%
compounded semi-annually, which offer has a Given: 𝑅 = 500,000 𝑡 = 0 𝑦𝑒𝑎𝑟𝑠 𝑟 =
better market value? If the focal date is today 0.08 𝑛 = 𝑚𝑡 = (2)(0) = 0 j= =
then, compute the present value of each offer. 0.04 𝑚=2
Mr. Velasco’s offer Mr. Abengoza’s offer Solution:
1.5 million after 6 ₱500,000 down = ⥤ = ⥤ = 500,000
months payment
2 million after two years ₱375,000 quarterly for
2 years

If the focal date is today then, compute the

present value of each offer.
 Illustrative To compute for the present value of an annuity with
Example 2. quarterly
- payment of ₱375,000 for 2
years with 8% interest compounded semi-annually:
A land owner plans to sell his estate. Two
individuals expressed their intent to buy the
Given: 𝑅 = 375,000 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠 𝑟 = 0.08
said estate. Mr. Velasco offered 1.5 million 𝑛 = (p)(𝑡) = (4)(2) = 8 𝑝=4 𝑚= 2
pesos payable after 6 months and 2 million Solution:
pesos after 2 years while Mrs. Abengoza Since the payment interval (𝑝) is not equal to interest interval( 𝑚),
offered a down payment of ₱500,000 plus convert to appropriate interest rate (𝑗).
Php375,000 every end of 3 months for 2
j = - 1 ⥤ j = - 1 ⥤ 0.019804
years. Suppose the money is earning 8%
compounded semi-annually, which offer has a
Note: In computing for the value of j, please use at least 5 decimal places.
better market value? If the focal date is today
then, compute the present value of each offer.
Mr. Velasco’s offer Mr. Abengoza’s offer = R[] ⥤ = 375,000[] ⥤ = 2,749,377.55
1.5 million after 6 ₱500,000 down
months payment
2 million after two years ₱375,000 quarterly for FMV = +
2 years FMV = 500,000 + 2,749,377.55
FMV = 3,249,377.55
If the focal date is today then, compute the
present value of each offer.
 Illustrative
Example 2. -

A land owner plans to sell his estate. Two

individuals expressed their intent to buy the
said estate. Mr. Velasco offered 1.5 million
pesos payable after 6 months and 2 million
pesos after 2 years while Mrs. Abengoza Fair market value of Mr. Velasco’s offer: 3,151,916.07
offered a down payment of ₱500,000 plus Fair market value of Mrs. Abengoza’s offer: 3,249,377.55
Php375,000 every end of 3 months for 2
years. Suppose the money is earning 8% Therefore, Mrs. Abengoza’s offer has a better fair
compounded semi-annually, which offer has a
better market value? If the focal date is today
market value.
then, compute the present value of each offer.
Mr. Velasco’s offer Mr. Abengoza’s offer
1.5 million after 6 ₱500,000 down
months payment
2 million after two years ₱375,000 quarterly for
2 years

If the focal date is today then, compute the

present value of each offer.
 “Thank you!”

- GROUP 3
 Quiz
A certain television set is for sale with 2 different payment schemes. The first payment scheme
has regular monthly payment of ₱5,000 for one year. The second payment scheme is ₱15,000
every 3 months also for one year. Assume that the prevailing interest rate is 4% per annum.
Guide questions:
a. Compare the present value of the 2 payment schemes.
b. Compare the future value of the 2 payment schemes. Answer:
c. Which payment scheme offers a better fair market value? Why?