Lesson 3

Fair Market Value

 Objectives

At the end of this lesson, the learner should be able to

● accurately define fair market value;

● accurately calculate the fair market value of a cash

flow stream; and

● correctly solve word problems involving fair market

value.
 Essential Questions

● What is a fair market value and why is it important?

● How is fair market value applied in real-life situations?

 Warm Up!

Before we discuss the lesson about Fair Market Value, let us

watch the following clip that will give you an overview of fair
market value, particularly the conditions that must be agreed
upon by the two negotiating parties involved in the
transaction.

Visit the following link:

Xargo. “What is Fair Market Value?” YouTube video, 1:28,
27 September 2015.
https://www.youtube.com/watch?v=0grQOrGD8L0
 Guide Questions

● Suppose you are a seller, what factors should you consider

in setting the price of a property being sold?

● If you are a buyer, what conditions must be satisfied in

establishing a deal with the seller?

● Give an example of a real-life situation that illustrates the

concept of fair market value.
 Learn about It!

Fair market value (FMV)

1 the price that two parties are willing to pay for an asset or liability, given the following
conditions:
• Both parties are well informed about the condition of the asset or liability.
• Neither party is under undue pressure to buy or sell the item.
• There is no time pressure to complete the deal.

Example:
Suppose you want to sell a car for ₱500 000. A buyer offers to
purchase the car at a lower price of ₱420 000. If you and the
buyer agreed on ₱450 000 after negotiating the price, then the fair
market value of the car is ₱450 000.
 Try It!

Example 1: A house is for sale at ₱25 500 000. Mr. Guavis

offers the seller ₱20 350 000 for the property. The two
discussed the price and agreed on ₱23 500 000. What is the
fair market value of the property?
 Try It!

Example 1: A house is for sale at ₱25 500 000. Mr. Guavis

offers the seller ₱20 350 000 for the property. The two
discussed the price and agreed on ₱23 500 000. What is the
fair market value of the property?

Solution:
Since Mr. Guavis and the seller agreed to the same price, the
fair market value of the house and lot is ₱23 500 000.
 Try It!

Example 2: Mrs. Monceda received two offers on a

beachfront house that she wants to sell.

Option A: Mr. Medina has offered ₱1 500 000 down payment, plus
₱4 000 000 lump sum payment six years from now.
Option B: Ms. Arnan has offered ₱700 000 down payment, plus ₱200 000
payment every end of the quarter for six years.

Compare the economic values of the two offers if money can

earn 6% compounded annually.
 Try It!

Solution:

To compare their economic values, we must get the

present value of the two offers and add their respective
down payments.
 Try It!

Solution:
1. Determine the present value for Mr. Medina’s offer.
 
Use the formula for finding the present value involving
compound interest.
 Try It!

Solution:
1. Determine the present value for Mr. Medina’s offer.
 
Use the formula for finding the present value involving
compound interest.
 Try It!

Solution:
2. Find the economic value for Mr. Medina’s offer. 

We add the down payment to the computed present

value of the lump sum payment to determine the
economic value. That is,
 Try It!

Solution:
3. Determine the present value for Ms. Arnan’s offer. 

Here, we will use the formula for finding the present

value of ordinary general annuity.
 
First, find the value of .
 
 Try It!

Solution:
3. Determine the present value for Ms. Arnan’s offer. 

Next, find the value of .

 
 Try It!

Solution:
3. Determine the present value for Ms. Arnan’s offer. 

Then, solve for the present value using the formula for
the present value of a general ordinary annuity.
 Try It!

Solution:
3. Determine the present value for Ms. Arnan’s offer. 
 Try It!

Solution:
3. Determine the present value for Ms. Arnan’s offer. 
 Try It!

Solution:
4. Find the economic value for Ms. Arnan’s offer. 

Let us add the down payment to the present value of

the general ordinary annuity to determine the economic
value.
 
 Try It!

Solution:
5. Compare the results.

It is better to choose Ms. Arnan’s offer since it is higher

than Mr. Medina’s offer. 
 Let’s Practice!

Individual Practice:

1. A piece of land in a commercial area is for sale at

₱2.4 million. A prospective buyer wants to negotiate since
the price is 25% higher than the market value and offers
to buy the land at ₱2 million instead. After a month-long
negotiation, the two parties agreed at the middle price.
How much is the fair market value of the land?
 Let’s Practice!

Individual Practice:

2. Given that the money grows by 5% compounded

quarterly for five years, which has a greater future value
for a high-end camera: (a) a payment of ₱6 000 at the end
of every six months or (b) a payment of ₱2 800 at the end
of every quarter?
 Let’s Practice!

Group Practice: Form groups of five students.

Mr. Alfonso wants to sell his vintage house, which has a

market value of ₱6 000 000 and an expected appreciation of
steady 3% per year. He received an offer from a prospective
buyer who will pay ₱1 500 000 down payment and equal
payment of ₱140 000 at the end of every quarter for eight
years. Suppose the money earns an interest of 4%
compounded annually. Does the offer match the market
value of the house in eight years?
Key Points

Fair market value (FMV)

1 the price that two parties are willing to pay for an asset or liability, given the following
conditions:

• Both parties are well informed about the condition of the asset or liability.
• Neither party is under undue pressure to buy or sell the item.
• There is no time pressure to complete the deal.
 Synthesis

● What is the fair market value?

● How can you apply the concept of fair market value in

your daily life as a student?

● Can the first payment interval of an annuity be delayed?