INTEREST AND MONEY-TIME RELATIONSHIPS (II)

The Five Types of Cash Flows:

1. Single Cash Flow

- the simplest case, involves equivalence of a single present amount and its future
worth.
2. Equal ( Uniform ) Series
- probably the most familiar category which includes transactions arranged as a
series of equal cash flows at regular intervals.
3. Linear Gradient Series
- cash flow when common pattern of variation occurs in terms of cash flow in a
series increases ( or decrease ) by a fixed amount.
4. Geometric Gradient Series
- another kind of gradient series that is formed when the cash flow is determined
not by some fixed amount but by some fixed rate, expressed as percentage.
5. Irregular Series
- a series of cash flow in that it does not exhibit a regular overall pattern.

Annuities
- is a series of equal payments occurring at equal periods of time.
P
1 2 3 n N

Formulas Relating Annuity , Present Worth and Future Worth Amounts:

Finding P given A: Finding F given A:

P A
 n
(1  i )  1  F  A
 (1  i) n  1

i (1  i ) n  [i ]

Illustrative Problems:
1. What are the present worth and the accumulated amount of a 10 year annuity paying
Php 10,000 at the end of each year, with interest at 15% compounded annually?
2. A plastic manufacturing company is intending to expand its production facilities
starting 1988. The program requires the following estimated expenditures:
Php 1,000,000 at the end of 1988
Php 1,200,000 at the end of 1990
Php 1,500,000 at the end of 1993
To accumulate the required funds, it established a sinking fund consisting of 15
uniform annual deposits, the first deposit having been made at the end of 1979. The
interest rate of the fund is 12% per annum. Calculate the annual deposit. What will be
the balance in the fund on January 1, 1990?
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 3. The officers and board of directors of the institute of Integrated Electrical Engineers
desire to award a Php 3,600 scholarship annually to deserving electrical engineering
students for as long as its scholarship fund shall last. The fund was started July 1,
1987 by a donor in the amount of Php 18,000. The IIEE invested this amount at that
time at 8% per annum and plans on adding Php 600 each year to the fund from its
dues starting July 1, 1988 for as long as awards are made.
a. For how many years starting July 1, 1988 can scholarship be awarded?
b. What will be the balance in the fund after the last award is made?
4. A chemical engineer wishes to set up a special fund by making uniform semi-annual
end-of-period deposits for 20 years. The fund is to provide Php 100,000 at the end of
each of the last five years of the 20 year period. If interest is 8% compounded semi-
annually, what is the required semi-annual deposit to be made?

Deferred Annuity:

Ordinary Annuity - involves the first cash flow being made at the end of the first period.

Deferred Annuity - if cash flow does not begin until some later date; one where the first
payment is made several periods after the beginning of the annuity.
P m periods n periods
0
m
1 2 3 1 2 3 4 n-1 n

0
A A A A A A
A ( P/A,i%,n)(P/F,i%,m) A ( P/A, i%, n )

P = A (P/A,i%,n)(P/F,i%,m)

P = A { [ 1-(1+i)-n ] / i } (1+i)-m

Sample Problems:
1. On the day his grandson was born, a man deposited to a trust company a sufficient
amount of money so that the boy could receive five annual payments of Php 10,000 each
for his college fees, starting with his 18th birthday. Interest at the rate of 12% per annum
was to be paid on all amounts on deposit. There was also a provision that the grandson
could elect to withdraw no annual payments and receive a single lump amount on his
25th birthday. The grandson chose this option.
a. How much did the boy receive as single payment?
b. How much did the grandfather deposit?
2. If Php 10,000 is deposited each year for 9 years, how much annuity can a person get
annually from the bank every 8 years starting 1 year after the 9th deposit is made. Cost of
money is 14%.
Perpetuity:
IEMECON: Interest and Money-Time Relationships II 2
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 - an annuity in which payments continue indefinitely.
P

1 2 3 4 n to 

P = A { [ 1- (1+i)-n]/i} = A { [1-(1+i)-]/i}

P = A/i

Sample Problem:
1. What amount of money invested today at 15% interest can provide the following
scholarships: Php 30,000 at the end of each yearfor 6 years; Php 40,000 for the next 6
years and Php 50,000 thereafter?

Linear Gradient Series:

- involves receipts and expenses that are projected to increase or decrease by a
uniform amount each period, thus constituting an arithmetic sequence of cash flows.
- ex: maintenance and repair expenses on specific equipment may increase by a
relatively constant amount each period; suppose that the maintenance expense on a
certain machine is Php 1000 at the end of the first year and increasing at a constant rate of
Php 500 each for the next four years : 3,000
2,500
2,000
1,500
1,000

0 1 2 3 4 5
This cash flow may be resolved into two components:
(n-1)G
3G
2G
G
A A A A A

0 0
+
1 2 3 4 5 1 2 3 4 5

A = Php 1,000 n = 5 G = Php 500 n = 5

G PisA known as the uniform gradient amount: PG

IEMECON: Interest and Money-Time Relationships II 3

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 Finding P when given G:
P = PA + PG
PA = A {( [ 1+i]n - 1 ) / i(1+i)n }
PG = G/i { [ (1+i)n - 1]/i - (n) } { 1/(1+i)n }

Finding F when given G:

F = G/i { [(1+i)n - 1]/i } - nG/i

Finding A when given G:

A = G { 1/i - n/[(1+i)n - 1] }

Sample Problem:
1. A loan was to be amortized by a group of four end of year payments forming an
ascending arithmetic progression. The initial payment was to Php 5,000 and the
difference between successive payments was to be Php 400. But the loan was
renegotiated to provide for the payment of equal rather than uniformly varying sums. If
the interest rate of the loan was 15% what was the annual payment?
2. Find the equivalent annual payment of the following obligations at 20% interest rate.
End of year Payment
1 Php 8,000
2 7,000
3 6,000
4 5,000

Additional Problem:
1. A man bought a lot worth Php 1,000,000 if paid in cash. On the installment basis, he
paid a down payment of Php 200,000; Php 300,00 at the end of one year, Php 400,000 at
the end of three years and a final payment at the end of five years. What was the final
payment if interest was 20%.

IEMECON: Interest and Money-Time Relationships II 4

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