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Lesson12_Fair Market Value of a Cash Flow Stream with Annuity and Deferred Annuity

The document covers the concepts of fair market value and deferred annuities, detailing how to calculate present value and the period of deferral. It includes problem-based learning scenarios to illustrate these concepts, such as comparing offers for selling a lot and calculating the present value of annuities. Additionally, it discusses various payment schemes and their implications on cash value and interest rates.

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delacruzstephanie242
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6 views19 pages

Lesson12_Fair Market Value of a Cash Flow Stream with Annuity and Deferred Annuity

The document covers the concepts of fair market value and deferred annuities, detailing how to calculate present value and the period of deferral. It includes problem-based learning scenarios to illustrate these concepts, such as comparing offers for selling a lot and calculating the present value of annuities. Additionally, it discusses various payment schemes and their implications on cash value and interest rates.

Uploaded by

delacruzstephanie242
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson #12

-Fair Market Value of a Cash


Flow Stream with Annuity
- Deferred Annuity
2
OBJECTIVES:

Differentiate deferred annuity from


simple and general annuity

Calculate the present value and period


of deferral of a deferred annuity

Find the fair market value of a cash


flow stream with annuity
Fair Market
3

Value of a cash flow


on a particular date refers to
a single amount that is
equivalent to the value of the
payment stream at the date.
4
PROBLEM-BASED LEARNING

Mr. Ribaya received two offers on a lot that he


wants to sell. Mr. Ocampo has offered Php50,000
and Php1,000,000 lump sum payment 5 years
from now. Mr. Cruz has offered Php50, 000 plus
Php40,000 every quarter for five years. Which
offer has a higher market value if money can earn
5% compounded annually?
5

MR. OCAMPO’S OFFER

Mr. Ribaya received two offers on


- Php50,000 down a lot that he wants to sell. Mr.
Ocampo has offered Php50 000
payment and Php1 000 000 lump sum
payment 5 years from now. Mr.
Cruz has offered Php50, 000 plus
- Php1, 000, 000 Php40,000 every quarter for five
years. Which offer has a higher
after 5 years market value if money can earn
5% compounded annually?
6

MR. OCAMPO’S OFFER


COMPOUND INTEREST
- Computing interest on both the
principal and future interests
- Php50,000 down payment earned.

- Php1, 000, 000 after 5 𝐼𝑐 = 𝐹𝑉 − 𝑃


years where
𝑡
𝐹𝑉 = 𝑃 1 + 𝑟
7

MR. CRUZ’S OFFER

Mr. Ribaya received two offers on


- Php50,000 down a lot that he wants to sell. Mr.
Ocampo has offered Php50 000
payment and Php1 000 000 lump sum
payment 5 years from now. Mr.
Cruz has offered Php50, 000 plus
- Php40 000 every Php40,000 every quarter for five
years. Which offer has a higher
quarter for 5 years market value if money can earn
5% compounded annually?
8

MR. CRUZ’S OFFER


PRESENT VALUE OF ANNUITY

𝟏− 𝟏+𝒓 −𝒏
- Php50,000 down 𝐏𝐕 = 𝐏
payment 𝒓
R – regular payment
r – interest rate per period

- Php40,000 every
n – number of payments

𝒊 𝒎
quarter for 5 years 𝒓 = (𝟏 + ) 𝒕 − 𝟏
𝒎
9
PROBLEM-BASED LEARNING

Company A offers Php150, 000 at the end of 3


years plus Php300, 000 at the end of 5 years.
Company B offers Php25, 000 at the end of each
quarter for the next 5 years. Assume that money is
worth 8% compounded annually. Which offer has
a better market value?
10
PROBLEM-BASED LEARNING

Suppose Mr. Gran wants to purchase a cellular


phone. He decided to pay monthly for 1 year
starting at the end of the month. How much is the
cost of the cellular phone if his monthly payment is
Php2,500 and interest is at 9% compounded
monthly?
11

MR. GRAN – Cellular Phone


PRESENT VALUE OF ANNUITY

𝟏− 𝟏+𝒓 −𝒏
- ₱2,500 monthly for 𝐏𝐕 = 𝐏
1 year 𝒓
R – regular payment
r – interest rate per period
n – number of payments

- 9% compounded 𝒊
monthly 𝒓=
𝒎
12
PROBLEM-BASED LEARNING

What if Mr. Gran is considering another cellular


phone that has a different payment scheme? In
the scheme, he has to pay Php2,500 for 1 year
starting at the end of the fourth month. If the
interest rate is also 9% converted monthly, how
much is the cash value of the cellular phone?
Deferred
13

Annuity is an
annuity that does not
begin until a given time
interval has passed.
Period of
14

Deferral is the time


between the purchase of an
annuity and the start of the
payments for the deffered
annuity.
15

PRESENT VALUE OF A DEFERRED ANNUITY

−(𝐤+𝐧) −𝐤
𝟏− 𝟏+𝐫 𝟏− 𝟏+𝐫
𝐏𝐕 = 𝐏 −𝐏
𝐫 𝐫
P – regular payment
r – interest rate per period
n – number of payments
k – number of conversion periods in the period of deferral (or number of artificial payment)
16
PROBLEM-BASED LEARNING

What if Mr. Gran is considering another cellular


phone that has a different payment scheme? In
the scheme, he has to pay Php2,500 for 1 year
starting at the end of the fourth month. If the
interest rate is also 9% converted monthly, how
much is the cash value of the cellular phone?
17
PROBLEM-BASED LEARNING

A recently married couple wants to establish a


trust fund that will serve as their savings fund for
their future family. The trust fund will pay the
couple Php50,000 per year for 20 years after
being deferred for 10 years. It will earn 4% interest
compounded quarterly and is to be paid out
quarterly. How much is the present value of this
trust fund?
18
PROBLEM-BASED LEARNING

A credit card company offers a deferred payment


option for the purchase of any appliance. Rose
plans to buy a smart television set with monthly
payments of Php4,000 for 2 years. The payments
will start at the end of 3 months. How much is the
cash price of the TV set if the interest rate is 10%
compounded monthly?
19

A credit card company offers a deffered payment option for the purchase of any
appliance. Rose plans to buy a smart television set with monthly payments of
Php4,000 for 2 years. The payments will start at the end of 3 months. How much
is the cash price of the TV set if the interest rate is 10% compounded monthly?
−(𝑘+𝑛) −𝑘
1− 1+𝑟 1− 1+𝑟
𝑃𝑉 = R −𝑅
𝑟 𝑟

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