CASH FLOW DIAGRAM

- A cash flow diagram is simply a graphical

representation of cash flows drawn
on a time scale.

receipt (positive cash flow or cash inflow)

disbursement (negative cash low or cash outflow)

This diagram may be drawn according to the following
viewpoints:

1. Borrower’s Viewpoint

P
0 1 2 3 4
n

F
 2. Lender’s Viewpoint

0 1 2 4
3 n

P
Example:
1. A loan of P100 simple interest of 10% will become P150 after
5 years.
Cash flow diagram on the viewpoint of the lender
F= P150

P = P 100 0 1 2 3 4 5

Cash flow diagram on the viewpoint of the borrower

P = P 100

0 1 2 3 4 5 F = P 150
 SAMPLE PROBLEM
• Before evaluating the economic merits of a
proposed investment, the XYZ Corporation
insists that its engineers develop a cash flow
diagram of the proposal. An investment of
$10,000 can be made that will produce
uniform annual revenue of $5,310 for 5
years & then have a positive salvage value
of $2,000 @ the end of year 5. Annual
expenses will be $3,000 @ the end of each
year for operating & maintaining the project.
Draw a cash flow diagram for the 5-year life
of the project.
 Solution:
$2,00
0
$5,31 $5,31
$5,31 0 $5,31 $5,31
0 0 0 0
1 2 3 4 5

$3,00 $3,00 $3,00 $3,00 $3,00

0 0 0 0 0

$10,00
0
 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=
0 1 15%
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
P100,00
0
1 2 3 4
P30,000 P30,000(1.15)
3
P40,00 P40,000(1.15)
0 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
 at 2,

P100,00 ∑↑ =
0 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
X=
P30,000(1.15)
P30,000 1 P76,374.38

P40,00
0
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
P300,00
0
P400,00
0
P300,000 (P/F, 20%,1)
Q
P400,00 (P/F, 20%,3) Q (P/F, 20%, 5)
 Using today as the focal date, the equation of
value is:

P 800,000 = P 300,000 (P/F, 20%, 1) + P 400,000 (P/F, 20%, 3) + Q (P/

F, 20%, 5)

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
 SAMPLE PROBLEM
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% and the end of 1 year 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 at the
end of 6 months will discharge his debts. Put the focal
date at the end of (a) 6 months and (b) 9 months.
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 at the end of 1 year.
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?
6. A manufacturing firm contemplates retiring an
existing machine at the end of 1982. The new
machine to replace the existing one will have an
estimated cost of P 100,000.00. This expense will
be partially defrayed by sale of the old machine as
scrap for P 7,500.00. To accumulate the balance of
the required capital, the firm will deposit the
following sums in an account earning interest at 5%
compounded quarterly:
P 15,000.00 at the end of 1979
P 15,000.00 at the end of 1980
P 20,000.00 at the end of 1981
What cash disbursement will be necessary at the end
of 1982 to purchase the new machine?
2. A firm borrows P 6,000.00 for 6 years at 8%. At
the end of 6 years, it renews the loan for the
amount due plus P 2,000.00 more for 2 years at 8%.
What is the lump sum due?
(a)P 6,135.00 (b) P 5,280.00
(c) P 5,254.00 (d) P 6,035.00
3. American Express Corp. charges 1 ½% interest
per month, compounded continuously on the
unpaid balance purchases made on this credit card.
Compute the effective rate of interest.
19.72% (b) 20.25%
(c) 21.20% (d) 19.90%
4. P 200,000 was deposited for a period
of 4 years and 6 months and bears on
interest of P 85,649.25. What is the rate
of interest if it is compounded quarterly?
(a) 8% (b) 6%
(c) 7% (d) 5%
 SEATWORK
A man wishes his son to receive P
200,000.00 ten years from now. What
amount should he invest now if it will
earn interest of 10% compounded
annually during the first 5 years and 12%
compounded quarterly during the next 5
years?
ANS: P 68, 758.67
2. Jones Corporation borrowed P 9,000.00
from Brown corporation on Jan. 1, 1978 and
P 12,000.00 on Jan 1, 1980. Jones
Corporation made a partial payment of P
7,000.00 on Jan 1, 1981. It was agreed that
the balance of the loan would be amortized
by two payments, one on Jan. 1, 1982 and
the other on Jan. 1, 1983, the second being
50% larger than the first. If the interest rate
is 12%, what is the amount of each payment?
ANS. P 9,136.91; P 13, 705.36
ANNUITIES

An annuity is a series of equal payments occurring at equal periods of time

Annuities occur in the following instances:

1. Payment of a debt by a series of equal payments at equal interval of time. This
occurs when goods are brought on the installment plan, the payments for w/c are
usually of equal amounts paid periodically, usually monthly.

2. Accumulation of a certain amount by setting equal amounts periodically. This

occurs when a person saves equal amounts and deposits these periodically in a
bank; when equal amounts are set aside at equal intervals of time to take care of the
depreciation of equipment & to provide for their replacement at a definite future time.

3. Substitution of a series of equal amounts periodically in lieu of a lump sum at

retirement of an individual.
Types of Annuities:
An ordinary annuity is one where the equal payments are made at the end of each payment
period starting from the first period.

A deferred annuity is one where the payment of the first amount is deferred a certain number
of periods after the first.

An annuity due is one where the payments are made at the start of each period, beginning
from the first period.

A perpetuity is an annuity where the payment periods extend forever or in w/c the periodic
payments continue indefinitely.

Symbols & their meaning

P = value of money at present
F = value of money at some future time
A = a series of periodic, equal amounts of money
n = number of interest periods
i = interest rate per interest period
 ORDINARY ANNUITY
Finding P when A is given

0 1 2 3 n- n
1

A A A A A
A(P/F,i%,1)

A(P/F,i%,2)
A(P/F,i%,3)
A(P/F,i%,n-1)

A(P/F,i%,n)
 P=A 1 – (1 + i) -n = A ( 1 + i)n - 1
i i ( 1 + i)n

The quantity in brackets is called “uniform series present

worth factor” and is designated by the functional symbol P/
A,i%,n, read as “P given A at i percent in n interest periods.
” And can be expressed as
P = A(P/A,i%,n)
 Finding F when A is given

0 1 2 3 n- n
1

A A A A
A

A(F/P,i%,1)

A(F/P,i%,n-3)

A(F/P,i%,n-2)

A(F/P,i%,n-1)
 (1+i)n - 1
F =A
i

The quantity in brackets is called the “uniform series compound

amount Factor” and is designated by the functional symbol F/A,
i%,n, read as“F given A at I percent in n interest periods. And
can be written as

F = A (F/A,i%,n)
 Finding A when P is given

i
A=P 1-(1+i)-n

The quantity in brackets is called the “capital recovery factor.” It is denoted by the
Functional symbol A/P,i%,n w/c is read as “A given P at i percent in n interest
periods.” Hence, A = P(A/P, i%,n)
Finding A When F is
Given i
A = F
(1+i) n-1

The quantity in brackets is called the “sinking fund factor.” It is denoted by

the Functional symbol A/F,i%,n w/c is read as “A given F at i percent in n
interest Periods.” Hence,

A = F(A/F,i%,n)
1. What are the present worth and the accumulated amount of a 10-
year annuity paying P10,000 at the end of each year, w/ interest at
15% compounded annually?

Solution:

A = P10,000 n = 10 i = 15%
F

0 1 2 3 9 1
0

P10,00 P10,00 P10,00 P10,00

P10,00
0 0 0 0
0
P = A(P/A,i%,n)
[1-(1+i)-n ]
= A i
= P10,000 [1 – (1.15)-10]
0.15
P = P50,187.68626

F = A(F/A,i%,n)
= A [(1+i)n - 1
i
= 10,000 [(1.15)10-1]
0.15
= P203,037.1824
. What is the present worth of P500 deposited at the end of every
three months for 6 years if the interest rate is 12% compounded semi-
annually?

Solution:
Solving for the interest rate per quarter,
(1+r/4)4 – 1 = (1 + 0.12/2)2 – 1
r/4 = 0.0296 or 2.96%
r = 0.1182520564
P = A (P/A,2.96%,24)

A[1-(1+i)-n ] i = .1182520564/4 = 0.0296

= i
= P500 [1-(1+0.0296)-24]
0.0296
= P500 (17.0087)
= P8,504
 SAMPLE PROBLEMS ON ORDINARY ANNUITIES

1. Ria rose borrowed P50,000.00 fr. SSS in the form of calamity loan, w/ int.
@8% comp. quarterly payable in equal quarterly installments for 10yrs. Find the
quarterly payments.
2. A manufacturing firm wishes to give each 80 employees a holiday bonus.
How much is needed to invest monthly for a yr. @ 12% nominal interest rate,
comp. mo., so that each employee will receive a P2,000.00 bonus?
3. A man paid a 10% down payment of P200,000.00 for a house & lot & agreed
to pay the balance on monthly installments for 5yrs. @ an int. rate of 15%
compounded mo. What was the mo. Inst. In pesos?
4. Money borrowed today is to be paid in 6 equal payments @ the end of 6
quarters. If the int. is 12% comp. quarterly, how much was initially borrowed if
quarterly payments is P2,000.00?
5. Mr. Robles plans a deposit of P500.00 @ the end of each month for 10yrs.
@ 12% annual int., comp. mo. The amt. that will be available in two yrs. is?
 DEFERRED ANNUITY
A deferred annuity is one where the first payment is made several
periods after the beginning of the annuity.

m periods

n periods

Ordinary annuity
periods
Deferred periods
0’
0 A A A A n
1 2 3 m
1 2 3 4
A
FORMULA:

P=A 1 – (1 + i) –n ( 1 + i) -m
i
 Sample problem
1. A new generator has just been installed. It is expected that there
will be no maintenance charges until the end of the 6th year, when
P300 will be spent at the end of each successive year until the
generator is scrapped at the end of its fourteenth year of service.
What sum of money set aside at the time of installation of the
generator at 6% will take care of all maintenance expenses for the
generator?
2. A parent wishes to develop a fund for a new born child’s college
education. The fund is to payp50,000.00 on the 18th, 19th, 20th &
21st birthdays of the child. The fund will be built up by the deposit of
fixed sum on the child’s first to seventeenth birthday’s.
3. A man loans P187,400.00 from a bank w/ int. at 5%
compounded annually. He agrees to pay to pay his
obligations by paying 8 equal annual payments, the first
being due at the end of 10yrs. Find the annual payments.
4. A house & lot can be acquired with a down payment of
P500,000.00 and a yearly payment of P100,000.00 at the end
of each year for a period of 10yrs., starting at the end of 5 yrs.
from the date of purchase. If money is worth 14%
compounded annually, what is the cash price of the property?
5. If money is worth 5% compounded semi-annually, find the
present value of a sequence of 12 semi-annual payments of
P500.00 each, the first of which is due at the end of 4 ½ years.
 PERPETUITY

it is anannuity where payments are made indefinitely or forever

P

1 2 3 4 5
0
n =∞
A A A A A

P = A/i
SAMPLE PROBLEM:
1. A wealthy man donated a certain amount of money in a bank at a rate of 12% compounded
annually to b able to pay the following scholarship awards; P4,000 per year for the first 5 yrs.; P6000
per yr. for the next 5 yrs. and P9,000 per year on the years thereafter. Find the amount of money
deposited by the man.
PF PP
perpetuit
y
Pd
P9,000
deferred ea.
PO Annuity
P6,000
Ordinary
ea.
annuity
P4,000 ea.
1 2 3 4 5 6 7 8 9 1 11 1 1 1
0 2 3 4
0
m=
’ n=
5 5

The equation of value at 0 is,

P = PO + P d + PF
 ANNUITY DUE
- It is the annuity where the payment started at the beginning of the annuity periods.

FINDING P WHEN A IS GIVEN

0 1 2 3 4 n-1 n

A A A A A A

P=A 1 – (1 + i ) – (n-1) +
i 1

F=A ( 1 + i ) (n+1) - 1 1
i
A man bought a car costing P 450,000 payable in 5 years at a rate of
24% compounded semi-annually in installment basis. If each semi-
annual payment is payable at the beginning of each period,
determine the amount of each payment?