*

Engr. Mario M. Barrera

 * EQUATION OF VALUE
It is the resulting equation when comparing two sets of
obligations at a certain point of comparison called the focal date. At
the focal date the equation of value is, Sum of cash Inflow is equal to
Sum of Cash Outflow, or at the focal date there exists cash flow
equilibrium.

FORMULA:
Σ↑ = Σ↓

Problem:
A young engineer bought a second hand car worth P 150,000 if paid
in cash. On the installment basis, he paid a down payment of P50,000;
P30,000 at the end of one year; P40,000 at the end of 2 years and a final
payment at the end of 4 years. What will be the final payment if money is
worth 15% per annum?
* SOLUTION:

Draw the cash flow diagram

P150,000
i = 15%
0 1 2 3 4

P30,000 P40,000
X=?
P50,000
Note:
Two cash flows at the same point may be simplified by considering
the resultant.
Simplified CFD,

0 F = P (1 + i)n
P100,000(1.15)4
P100,000

1 2 3 4
P30,000 P30,000(1.15)3

P40,000 P40,000(1.15)2

X=?
* Steps:
1. Select a focal date, there are 5 choices (0 to 4).

2. Draw a vertical line passing through the selected focal date.

3. Project all cash flows on the line.

4. Set – up the equation of value.

Considering 4 as focal date then,

∑↑ = ∑↓

100,000(1.15)4 = 30,000(1.15)3 + 40,000(1.15)2 + X

X = P76,374.38
 *
Focal point at 2,
P100,000 ∑↑ = ∑↓
P100,000 (1.15)2
P100,000(1.15)2 = P30,000(1.15)1 +
P40,000 + X(1.15)-2
1 2 3 4
0
P30,000(1.15)1 X = P76,374.38
P30,000

P40,000

P=F(1+i)-n
X
X(1.15)-2
 * EQUATION OF VALUE
Sample Problem:
A man bought a lot worth P1,000,000.00 if paid in cash. On the
installment basis, he paid a down payment of P200,000.00; P300,000.00
at the end of one year; P400,000.00 at the end of the three years and a
final payment at the end of five years. What was the final payment if
interest was 20 %?
Solution:
Let Q = the final payment

P800,000
0 1 3 4 5
2
P300,000

P400,000

P300,000 (1+.20)¹
Q
P400,00 (1+.20)³ Q (1+.20)⁵
*

Using today as the focal date, the equation

of value is:

P 800,000 = P 300,000 (1.20)-1 + P 400,000 (1.20)-3 + Q

(1.20)-5

P 800,000 = P 300,000 (.8333) + P 400,000 (.5787) + Q

(0.4019)

Q = P 792, 560.00
 Solve the following problems. Send your answer to
“mariombarrera03@yahoo.com”. Use the subject “Equation of value -
CEIT-04-501A”

1. Mr. Jose owes P 4,500.00 due in 4 months and P 6,000.00 due in 6

months. If money is worth 5%, what single payment made today will
settle both debt?
2. A man owes P 20,000.00 due in 2 months, P 10,000.00 due in 5 months,
and P 18,000.00 due in 9 months. He wishes to discharge his
obligations by two equal payments due in 6 and 12 months respectively.
Find the equal payments if money is worth 6% year 1 is the agreed focal
date.
3. A man owes P 5,000.00 due in 3 months with interest at 5% and P
15,000.000 due in 9 months with interest at 4%. If money is worth
6%, what single payment made on the 6th months will discharge his
debts. Put the focal date on the (a) 6th month and (b) 9th month.
4. Mr. Asero bought a lot for P 50,000.00 with a down payment of P
5,000.00. He agreed to pay 6% simple interest on the balance. If he
paid P 20,000.00 three months after purchase and P 15,000.00 six
months later, what payment 1 year after the date of purchase will
discharge his obligation. Put the focal date on year 1.
5. Mr. Ramos owes P 10,000.00 due 3 years from today. If he pays P
4,000.00 today, what payment 2 years from today will discharge his
debt, money is worth 5% compounded semi-annually?