Quarter 2 - Module 6: Fair Market Value of a Cash Flow

*The text color of your answers should be in “BLUE”

What’s More
Activity 1.1

1. Monthly payments of ₱ 3,000 for 4 years with an interest rate of 3% compounded

quarterly.

Given:
R = ₱ 3,000
𝑚1 = 12
𝑚2 = 4
𝑡=4
𝑟 (𝑚2) = 0.03
𝑛 = (𝑚1 )(𝑡)
𝑛 = (12)(4)
𝑛 = 48
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
0.03 4⁄
= (1 + ) 12 − 1
4
𝒊 = 𝟎. 𝟎𝟎𝟐𝟒𝟗𝟑𝟕𝟖

Find the present value.

1−(1+𝑖)−𝑛
P=R 𝑖
1−(1+0.00249378)−48
= 3,000 0.00249378

P = ₱ 135,556.29

Find the future value.

(1+𝑖)𝑛 −1
F=R
𝑖

(1+0.00249378)48 −1
= 3,000 0.00249378

F = ₱ 152,770.90
 2. Quarterly payments of ₱ 5,000 for 10 years with an interest rate of 2%
compounded annually.

Given:
R = ₱ 5,000
𝑚1 = 4
𝑚2 = 1
𝑡 = 10
𝑟 (𝑚2) = 0.02
𝑛 = (𝑚1 )(𝑡)
𝑛 = (4)(10)
𝑛 = 40
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
0.02 1⁄
= (1 + ) 4−1
1
𝒊 = 𝟎. 𝟎𝟎𝟒𝟗𝟔𝟐𝟗𝟑

Find the present value.

1−(1+𝑖)−𝑛
P=R 𝑖
1−(1+0.00496293)−40
= 5,000 0.00496293

P = ₱ 180,993.53

Find the future value.

(1+𝑖)𝑛 −1
F=R 𝑖

(1+0.00496293)40−1
= 5,000 0.00496293

F = ₱ 220,630.10

3. Semi-annual payments of ₱105,000 with an interest rate of 12% compounded

annually for 5 years.

Given:
R = ₱ 105,000
𝑚1 = 2
𝑚2 = 1
𝑡=5
𝑟 (𝑚2) = 0.12
𝑛 = (𝑚1 )(𝑡)
 𝑛 = (2)(5)
𝑛 = 10
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
0.12 1⁄
= (1 + ) 2−1
1
𝒊 = 𝟎. 𝟎𝟓𝟖𝟑𝟎𝟎𝟓

Find the present value.

1−(1+𝑖)−𝑛
P=R 𝑖
1−(1+0.0583005)−10
= 105,000 0.0583005

P = ₱ 779,069.93

Find the future value.

(1+𝑖)𝑛 −1
F=R
𝑖

(1+0.0583005)10 −1
= 105,000 0.0583005

F = ₱ 1,372,987.09

Future Value (F) Present Value (P)

1. Monthly payments
of ₱ 3,000 for 4
years with an
₱ 152,770.90 ₱ 135,556.29
interest rate of 3%
compounded
quarterly.
2. Quarterly payments
of ₱ 5,000 for 10
years with an
₱ 220,630.10 ₱ 180,993.53
interest rate of 2%
compounded
annually.
3. Semi-annual
payments of
₱105,000 with
₱ 1,372,987.09 ₱ 779,069.93
an interest rate of
12% compounded
annually for 5 years.
 Activity 1.2

R im m t n j F P

1. Monthly
payments of
₱ 2,000 for 5
years with an
₱2,000 0.12 4 5 60 0.009902 ₱162,825.79 ₱90,150.73
interest rate
of 12%
compounded
quarterly.

2. Quarterly
payments of
₱ 15,000 for
10 years with
₱15,000 0.08 1 10 40 0.019427 ₱894,860.28 ₱414,486.09
an interest
rate of 8%
compounded
annually.

3. Semi-annual
payments of
₱ 150,000
with an
interest rate ₱150,000 0.06 1 6 12 0.029563 ₱2,123,527.11 ₱1,497,003.06
of 6%
compounded
annually for
6 years.

1. Monthly payments of ₱ 2,000 for 5 years with an interest rate of 12% compounded
quarterly.
Given:
R = ₱ 2,000
𝑚1 = 12
𝑚2 = 4
𝑡=5
𝑟 (𝑚2) = 0.12
𝑛 = (𝑚1 )(𝑡)
𝑛 = (12)(5)
𝑛 = 60
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
 0.12 4⁄
= (1 + ) 12 − 1
4
𝒊 = 𝟎. 𝟎𝟎𝟗𝟗𝟎𝟐

Find the present value.

1−(1+𝑖)−𝑛
P=R 𝑖
1−(1+0.009902)−60
= 2,000 0.009902

P = ₱ 90,150.73

Find the future value.

(1+𝑖)𝑛 −1
F=R 𝑖

(1+0.009902)60−1
= 2,000 0.009902

F = ₱ 162,825.79

2. Quarterly payments of ₱ 15,000 for 10 years with an interest rate of 8%

compounded annually.
Given:
R = ₱ 15,000
𝑚1 = 4
𝑚2 = 1
𝑡 = 10
𝑟 (𝑚2) = 0.08
𝑛 = (𝑚1 )(𝑡)
𝑛 = (4)(10)
𝑛 = 40
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
0.08 1⁄
= (1 + ) 4−1
1
𝒊 = 𝟎. 𝟎19427

Find the present value.

1−(1+𝑖)−𝑛
P=R
𝑖
1−(1+0.019427)−40
= 15,000 0.019427
P = ₱ 414,486.09

Find the future value.

(1+𝑖)𝑛 −1
F=R 𝑖

(1+0.019427)40 −1
= 15,000 0.019427

F = ₱ 894,860.28

3. Semi-annual payments of ₱ 150,000 with an interest rate of 6% compounded

annually for 6 years.
Given:
R = ₱ 150,000
𝑚1 = 2
𝑚2 = 1
𝑡=6
𝑟 (𝑚2) = 0.06
𝑛 = (𝑚1 )(𝑡)
𝑛 = (2)(6)
𝑛 = 12
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2
0.06 1⁄
= (1 + ) 2−1
1
𝒊 = 𝟎. 𝟎𝟐𝟗𝟓𝟔𝟑

Find the present value.

1−(1+𝑖)−𝑛
P=R 𝑖
1−(1+0.029563)−12
= 150,000 0.029563

P = ₱ 1,497,003.06

Find the future value.

(1+𝑖)𝑛 −1
F=R 𝑖

(1+0.029563)12−1
= 150,000
0.029563

F = ₱ 2,123,527.11
Activity 1.3

Answer the following problems:

1. The buyer of a car pays ₱ 169,000 cash and ₱ 12,000 every month for 5 years. If
money is 10% compounded monthly, how much is the cash price of the car?

Down payment = ₱ 169,000

R = ₱ 12,000

r = 0.1

t = 5 years

m = 12

n = mt = (12)(5) = 60

𝑟 0.1
𝑖= =
𝑚 12
1−(1+𝑖)−𝑛
P=R 𝑖
0.1
1−(1+ 12 )−60
= 12,000 0.1
12

= ₱564,784.43
₱ 564,784.43 + ₱ 169,000.00
= ₱ 733,784.43

What I Have Learned

1. General annuity is defined as an annuity where the length of the payment interval is
not the same as the length of the interest compounding period while general ordinary
annuity is a general annuity in which the periodic payment is made at the end of the
payment interval

2. A cash flow is a term that refers to payments received (cash inflows) or payments or
deposits made (cash outflows). Cash inflows can be represented by positive numbers
and cash outflows can be represented by negative numbers. It is also the amount of cash
and cash-equivalents being transferred into and out of the business.

3. The fair market value or economic value of a cash flow (payment stream) on a
particular date refers to a single amount that is equivalent to the value of the payments
stream at that date. This particular date is called the focal date.
What I Can Do
1. A television set is for sale at ₱ 13,499 in cash or on installment terms, ₱ 2,500 each
month for the next 6 months at 9% compounded annually. If you were the buyer, what
would you prefer, cash or installment?
Given:
R = ₱ 2,500
𝑚1 = 12
𝑚2 = 1
1
𝑡 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝑜𝑟 𝑜𝑟 0.5
2
𝑟 (𝑚2) = 0.09
𝑛 = (𝑚1 )(𝑡)
𝑛 = (12)(0.5)
𝑛=6
𝑟 (𝑚2) 𝑚2⁄𝑚
𝑖 = (1 + ) 1 −1
𝑚2

0.09 1⁄
= (1 + ) 12 − 1
1
𝒊 = 𝟎. 𝟎𝟎𝟕𝟐𝟎𝟕𝟑𝟐

Find the future value.

(1+𝑖)𝑛 −1
F=R 𝑖

(1+0.00720732)6 −1
= 2,500 0.00720732

F = ₱ 15,272.95

Paying in installments is better when you are on a tight budget. But if I were the
buyer, I would prefer to pay in cash if I have the available cash for it.