PRINCIPLES OF MONEY TIME

RELATIONSHIPS
ES 032
Jefrancis Concepcion

05/29/2024
TOPICS
• Simple Interest
• Compound Interest
• Annuities
• Gradient Series
• Special case of Annuities

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Lesson Objectives
• Define the different terms
related to economics.
• Apply money - time
relationship.

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ANNUITY DUE
the payments are made at the beginning of each period.

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ORDINARY ANNUITY ANNUITY DUE

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Example 1
• A farmer bought an irrigation pump for P12,000 if paid in cash,
however, the pump maybe purchased in instalment basis to be
paid within 5 years. Money is worth 8% compounded annually.
Determine the amount of each annual payment if all payments
are made at the start of each period.

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 Example 1
• A lathe for a machine shop costs P60,000 if paid in cash. On
the instalment plan, the purchaser should pay P20,000
downpayment and 10 quarterly instalments, the first due at the
end of the first year after purchase. If money is worth 15%
compounded quarterly, determine the quarterly instalment.
Given: P = P12,000; r = 0.08 @ m = 1;
A=?
Everything is given already so we can directly substitute all given
into the formula.
Since the price is given, the present amount formula will be used,

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LEARNING CHECK!
1) Suppose a father, on the day his son is born, wishes to
determine what lump amount would have to be paid into an
account bearing interest of 12% per year to provide withdrawals
of $2,000 on each of the son’s 18th , 19th, 20th and 21st birthdays.

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PERPETUITY
an ordinary annuity where the payment periods continue indefinitely

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 Example 2
• What is the present worth of a perpetual annuity of P2,000 each
payable at the end of each year?. Money is worth 10%
compounded quarterly

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 Example 2
• What is the present worth of a perpetual annuity of P2,000 each
payable at the end of each year?. Money is worth 10%
compounded quarterly
Given: A = P2,000/year; r = 0.1 @ m = 4;
P=?
Converting first the compounding to match the yearly payment

Solving for P ->

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 Example 3
• The maintenance costs associated with a machine are $2000
per year for the first 10 years and $1000 per year thereafter.
The machine has an infinite life. If interest is 10%, what is the
present worth of the annual disbursements?

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 Example 3
• The maintenance costs associated with a machine are $2000
per year for the first 10 years and $1000 per year thereafter.
The machine has an infinite life. If interest is 10%, what is the
present worth of the annual disbursements?
CFD
To solve this, the same approach in
deferred annuity will be used. The
cash flow should be broken down into
different transactions.

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Example 3
Considering first the $2000 cost for 10 years, Now, considering the $1,000 per year thereafter,

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 Example 3
Considering first the $2000 cost for 10 years,

this transaction forms an ordinary annuity

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Example 3
Now, considering the $1,000 per year thereafter,

Perpetuity is formed on the $1,000 transaction. Solving

the present worth, 𝑃2, of the $1,000 perpetuity following
the original CFD will be

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Example 3
Now, considering the $1,000 per year thereafter,

Perpetuity is formed on the $1,000 transaction. Solving

the present worth, P2, of the $1,000 perpetuity following
the original CFD will be

But, the present worth P2 is at the 10th year while the

problem asks for present worth at the start.

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Example 3
Now, considering the $1,000 per year thereafter,

Perpetuity is formed on the $1,000 transaction. Solving

the present worth, P2, of the $1,000 perpetuity following
the original CFD will be

But, the present worth P2 is at the 10th year while the

problem asks for present worth at the start.

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Example 3
To solve this, let’s now consider P2 alone with another
CFD,

From this, P2’ can be solved using compound interest with

P2 as the future amount and P2’ as the present amount

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Example 3
But, this 2 transactions are originally together so the both present amount should
be added to get the total present amount as a whole transaction.

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ANNUITY DUE
the payments are made at the beginning of each period.

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