Your

Exercise Points Points Remarks

1 8.0
2 15.0
3 5.0
4 2.0
5 2.0

Total 35.0 3.0

Jocel Reyes wishes to choose the better of two equally costly cash flow streams: Annuity X and
Annuity Y. X is an annuity due with a cash inflow of PhP9,000 for each of 6 years; Y is an
ordinary annuity with a cash inflow of PhP10,000 for each of 6 years. Assume that Jocel can
earn 15% on her investments.

a. On a purely subjective basis, which annuity do you think is more attractive? Why?
b. Find the future value at the end of year 6 for both annuities.
c. Use your findings in letter b to indicate which annuity is more attractive. Why?
d. Compare your finding to your subjective response in letter a.

Solution and Answer:

a. On a purely subjective basis, which annuity do you think is more attractive? Why?
answer: Annuity due is more attractive. Since payment occurs at the beginning of each period, an additional period is made av

b. Find the future value at the end of year 6 for both annuities.
Annuity X Annuity Y
Given: Given:
CF = Php 9,000 n = 6 years CF = Php 10,000
r = 15% r = 15%
Find: Future Value (FV) Find: Future Value (FV)
Formula: Formula:

FV=CF x (( 〖 (1+r) 〗 ^n-1)/r) x (1+r) FV=CF x (( 〖 (1+r) 〗 ^n-1)

Solution: Solution:

FV = x 〖 (1+.15) 〗 ^6-
9000 (( x ( 1 + .15) FV
1)/.15)

FV = Php 90601.19 FV = Php 87,537.38

c. Use your findings in letter b to indicate which annuity is more attractive. Why?
answer: Annuity due resulted in a greater amount of future value as shown and computed above. As seen with annuity due's for

d. Compare your finding to your subjective response in letter a.

answer: My subjective response in letter a and my findings in letter b are the similar. I was able to prove my choice through the
 additional period is made available for compounding. For instance, an investor gets to receive cash twice with annuity due since he/she ma

CF = Php 10,000 n = 6 years

re Value (FV)

V=CF x (( 〖 (1+r) 〗 ^n-1)/r)

= 10000 ((x〖 (1+.15) 〗 ^6-

1)/.15)

FV = Php 87,537.38

As seen with annuity due's formula, an additional compounding period is present that's why it gives off greater amount than ordinary annuity

prove my choice through the computation presented. It is true that annuity due gives higher amount than ordinary annuity.
nuity due since he/she may withdraw at the beginning of each period plus another withdrawal at the end of the term. Thus giving a greater a

unt than ordinary annuity.

m. Thus giving a greater amount of future value.
Present values of single amounts and streams

You have a choice of accepting either of two-5-year cash flow streams or single amounts. One
cash flow stream is an ordinary annuity, and the other is a mixed stream. You may accept
alternative A or B – either as a cash flow stream or as a single amount. Given the cash flow
stream and single amounts associated with each based on the following table, and assuming a
9% opportunity cost, which alternative (A or B) and in which form (cash flow stream or single
amount) would you prefer?

Cash Flow Stream

End of Alternative A Alternative B
Year (PhP) (PhP)
1 700 1,100
2 700 900
3 700 700
4 700 500
5 700 300

Single Amount
At time zero 2,825 2,800

Solution and Answer:

Ordinary annuity Mixed stream
Given: Given:
CF = Php 700 Year (n) Cash Flow
r = 9% 1 1,100
n = 5 years 2 900
3 700
Formula: 4 500
5 300
PV=CF x ((1 - 〖 (1+r) 〗 ^(-n))/r) r = 9%

Formula:
PV= CF/
Solution: 〖 ( 1+r) 〗 ^n
PVtotal = PV1 + PV2 + PV
PV=700 x ((1 - 〖 (1+.09) 〗 ^(-5))/.09) Solution:

Year (n) Cash Flow

PV = Php 2,722.76 1 1,100
2 900
Given; 3 700
CF = Php 700 4 500
r = 9% 5 300
n = 5 years PVtotal
 Find: FV
Formula: Year (n) Cash Flow
FV=CF x (( 〖 (1+r) 〗 ^n-1)/r) 1 1,100
2 900
3 700
FV=700 x (( 〖 (1+.09) 〗 ^5-1)/.09) 4 500
5 300

FV = Php 4,189.3
 Single amount
Alternative a Alternative b
Cash Flow Given: Given:
1,100 CF = Php 2,825 CF = Php 2,800
900 n=0 n=0
700 r = 9% r = 9%
500
300 Formula:
PV= CF/
〖 ( 1+r) 〗 ^n

PV= 2825/
〖 ( 1+.09) 〗 ^0
V1 + PV2 + PV3…..
PV = 2825

Cash Flow Computation PV

1,100 CF1 ÷ (1.09)1 1009.17 FV = CF (1 + r)n
900 CF2 ÷ (1.09)2 757.51 FV = 2825 (1 + .09)5
700 CF3 ÷ (1.09)3 540.53 FV = 4346.613
500 CF4 ÷ (1.09) 4
354.21
300 CF5 ÷ (1.09)5 194.98
2856.41
Cash Flow Computation FV
1,100 CF1 x (1.09)4 1552.74
900 CF2 x (1.09) 3

700 CF3 x (1.09)2

500 CF4 x (1.09)1
300 CF5 x (1.09)0
Alternative b

CF = Php 2,800

PV= CF/
〖 ( 1+r) 〗 ^n

PV= 2800/
〖 ( 1+.09) 〗 ^0

PV = 2800

FV = CF (1 + r)n
FV = 2800 (1 + .09)5
FV = 4308.147
Deposits needed to accumulate a future sum

Jopin Reyes wishes to accumulate PhP8,000 by the end of 5 years by making equal, annual,
end-of-year deposits over the next 5 years. If Jopin can earn 7% on her investment, how
much must she deposit at the end of year to meet this goal?

Solution and Answer:

Given:
FV = Php 8,000
r = 7%
n = 5 years

Find: Present value

Formula:
PV=FV ÷ (( 〖 (1+r) 〗 ^n-1)/r)

Solution:

PV=8000 ÷ (( 〖 (1+.07) 〗 ^5-1)/.07)

PV = Php 1,391.13
Future Value of a Lump-sum Investment

Assume a firm makes a PhP2,500 deposit into its money market account. If this account is
currently paying 0.7%, what will the account balance be after 1 year?

Solution and Answer:

Given:
PV = Php 2,500
r = 0.7%
n = 1 year

Find: Future value of a lum-sum investment (FV)

Formula:
FV =(PV x r)÷(1 -1/
〖 (1+r) 〗 ^n )
Solution:

FV =(2500 x .007)÷(1 -1/ 〖 (1+.007) 〗 ^1 )

FV= Php 2,517.50

Future Values of Annuities

If Jocel and Christian combine their savings of PhP1,260 and PhP975, respectively, and deposit this
amount into an account that pays 2% annual interest, compounded monthly, what will the
account balance be after 4 years?

Solution and Answer:

Given:
PV = Php 2,235
r = 2%
n = 4 years
m = 12

Formula:
FV=PV x (1+r/m)m x n

Solution:
FV=2235 x (1+.02/12)12 x 4

FV = Php 2,420.99