Prepared by:

MS. KAREN S. TAFALLA

INTEREST is the amount of money paid for the use of borrowed capital or
the income produced by money, which has been loaned.
PRINCIPAL is the amount of money used on which interest is charge.
SIMPLE INTEREST - is the interest to be paid which is directly proportional to
the principal involved, the interest period and the interest rate.
I = Pni
Where:
I = total interest earned or charged
P = principal amount lent or borrowed
n = number of interest periods
i = interest rate per interest period
ORDINARY SIMPLE INTEREST = an interest based on the bankers year
1 bankers year = 12 months, each consisting of 30 days = 360 days
EXACT SIMPLE INTEREST = an interest based on the exact number of days,
365 days for ordinary year and 366 days for leap year
NOTE: Unless otherwise stated on the problem, the ordinary simple interest is
used.

COMPOUND INTEREST the interest earned by the principal is

considered as added to the principal, and therefore will also earn
interest for the succeeding periods
Future Value Formula:
Fforsimple
P I interest
P Pni P(1 ni)

Fforcompound
P(1 i) n interest
INTEREST RATE:
The cost of borrowing money. It refers to the
amount earned by a unit principal per unit time.
Nominal Rate of interest is the basic annual rate of interest.
Effective rate of interest is defined as the actual or the exact rate of
interest earned on the principal during a one-year period

r
ER 1
1
m

where m is the number of interest period per year

CASH FLOW DIAGRAM

A cash flow diagram is a graphical representation
of cash flows on a time scale.
Receipts ( cash inflow )
Disbursement ( cash outflow)

EXERCISES
1. Determine

the ordinary and exact simple interest

on P1,200 for the period from January 12 to
November 26,1998. If the rate is simple interest is
12.5% per year.

2. Determine

the ordinary and exact simple interest

on P1,500 for 10 months and 15 days if the rate of
simple interest is 15% per year.

3.
Determine the simple interest rate if an
investment of P37,500 accumulates to P45,973.50
in 18 months.

4.

The repayment on a loan was P12,100. If the

loan was for 15 months at 16.8% interest a year,
how much was the principal?

5. Annie buys a television set from a merchant who

asks P1,250 at the end of 60 days (2 months).
Annie wishes to pay immediately and the
merchant offers to compute the cash price on the
assumption that money is worth 8% simple
interest. What is the cash price today.

6.

A deposit of P110,000 was made for 21 days. The net interest

after deducting 20% withholding tax is P890.36. Find the
simple rate of return.

7.

A savings deposit of P500 will amount in 5 years to what, if

interest is at 15% compounded annually?

8.

After 12 years a certain investment accumulated to P10,120. If

interest was at 10% compounded annually how much was the
original investment?

9.

How many years will be required for an investment of P30,000 to

increase to P40,000 at an interest rate of 5% per year
compounded annually?

10. What rate of interest compounded annually is involved if an

investment of P15,000 made now will result 10 years hence in a
receipt of P28,600?

11.

P200,000 was deposited on January 1, 1988 at an interest

rate of 24% compounded semiannually. How much would be
the sum be on January 1, 1993?

12. What is the effective rate corresponding to 18%

compounded daily? Take 1 year equal to 360 days.
13. How long will it take money to double itself if invested at 5%
compounded bimonthly?
14. A national credit card carries an interest rate of 2% per
month on the unpaid balance (a) calculate the effective rate
per semiannual period. (b) if the interest rate is stated 5%
per quarter, fine the effective rates per semiannual and
annual time periods.
15. If 500,000 is deposited at a rate of 11.25% compounded
monthly, determine the compounded interest after 7 years
an 9 months.

ANNUITIES
An annuity consists of a series of equal payments made at equal
intervals of time. There are four types of annuity- ordinary annuity,
deferred annuity, annuity due and perpetuity.
1. ORDINARY ANNUITY
An ordinary annuity is the one where the equal payments are made
at the end of each payment period starting from the first period.
2. DEFERRED ANNUITY
Deferred annuity is also an ordinary annuity but the payment of the
first amount is deferred a certain number of periods after the first.
3. ANNUITY DUE
An annuity due is one where the payments are made at the start of
each period, beginning from the first period.
4.

PERPETUITY
A type of annuity where the payment period extend forever or in
which the periodic payment continues indefinitely

FORMULAS
UNIFORM SERIES PRESENT WORTH FACTOR (P/A)
P = A (P/A, i%, n)

1 (1 i ) n
P A

UNIFORM SERIES CAPITAL RECOVERY FACTOR (A/P)

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

i
A P
n
1

(
1

i
)

UNIFORM SERIES COMPOUND AMOUNT FACTOR (F/A)

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

(1 i ) 1
F A

UNIFORM SERIES SINKING FACTOR (P/A)

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

i
A F

n
(
1

i
)

Examples:
1. Ms. Mercado bought a house thru the SSS housing loan.
She is required to pay P80,000 at the end of each year for
25 years. What is the original cost of the house if money is
worth 16% per year compounded annually.
2.A one bagger concrete mixer can be purchased with a down
payment of P200,000 and equal installments of P60,000
each paid at the end of year for the next 12 years. If money
is worth 12 % compounded monthly, determine the
equivalent cash price of the mixer.
3.How much would you have to deposit for five consecutive
years starting one year from now if you want to be able to
withdraw P50,000 ten years from now? Assume the interest
rate to be 14% compounded semi-annually?

4.A man borrows P50,000, which agrees to repay in

installments of P10,000 at the end of each year. How long
will it take to pay the principal and interest at 7%
compounded annually?
5.A grove of mango trees is expected to yield P15,000 a year
for 25 years after the tree come into full bearing. Find the
present value of the entire expected yield at an interest rate
of 7% per year compounded semi-annually, assuming the
first income of P15,000 to be due at the end of 5 years?
6.A highway contractor purchased a grader for P350,000. The
annual operation cost was P18,000 a year. Five years after
purchase, it was overhauled at a cost of P35,000. Three
years after the overhaul, it was sold for P180,000. If interest
rate is 15%, what was the equivalent uniform annual cost?

7.
A farmer bought a tractor costing P250,000
payable 10 annual payments, 10 each installments
payable at the beginning of each period. If the rate
of interest is 10% compounded annually,
determine the amount of each installment.
8.
If a woman deposits P500 every 6 months for
7 years, how much will she have in her account
after she makes her last deposit if the interest
rate is 20% per year compounded quarterly?

10. A man paid 10% down payment of P200,000

for a house and lot and agreed to pay the 90%
balance on monthly installment for 60 months at
an interest rate of 15% compounded monthly.
Compute the amount of the monthly payment

12. A loan association lends money at the rate of 15%

compounded semiannually. A man borrows P50,000
payable in 16 semiannual installment, the first payment
due at the end of two years reckoned from the date of the
loan. How much is each of the semiannual installments?
13. Christine deposits P150 a month into an account
paying 8% per year compounded quarterly. Twelve
months deposits were made. Determine how much will
be accumulated in the account one year after the last
deposit.

14. Calculate the equivalent lump sum receipt now

for the following cashflows: You invest $2,000
today, another $200 one year from now, and still
another $800 two years from now. You then
receive $1,000 each year for 10 years starting 4
years from now. The interest rate is 8% per year.

14. P0 = -$2,000 - $200 (P/F, 8%, 1) - $800 (P/F,

8%, 2)

$1,000 (P/A, 8%, 10)(P/F,

8%, 3)
= - $2,000 - $200 (0.9259) - $800
(0.8573) + $1,000 (6.7101) (0.7938)
= $2,455.46 (lump-sum receipt
now)

15. What lump sum of money must be deposited

into a bank account at present time so that $500
per month can be withdrawn for five years, with
the first withdrawal scheduled for six years from
today? The interest rate is % per month

15. This is a deferred annuity, the time periods are

months, and i = 3/4 % per month:
P71 = $500 (P/A, 3/4%, 60) = $500 (48.1733) =
$24,086.65
P0 = $24,086.65 (P/F, 3/4% ,71) = 24,086.65
(0.58836) = $14,171.62

16. An individual is borrowing $100,000 at 8%

interest compounded annually. The loan is to be
repaid in equal annual payments over 30 years.
However, just after the eighth payment is made,
the lender allows the borrower to triple the annual
payment. The borrower agrees to this increased
payment. If the lender is still charging 8% per
year, compounded annually, on the unpaid
balance of the loan, what is the balance still owed
just after the twelfth payment.

16

Original Payments

= A = $100,000 (A/P, 8%, 30) = $100,000 (0.0888) = $8,880

Balance at EOY 8
= $100,000 (F/P, 8%, 8) - $8,880 (F/A, 8%, 8)
= $100,000 (1.8509) - $8,880 (10.6366)
= $90,636.99
or
P8 = $8,880 (P/F, 8%, 22) = 8,880 (10.2007) = $90,636.99

New Payment = $8,880(3) = $26,640

Balance at EOY 12 = $90,636.99 (F/P, 8% , 4) - $26,640 (F/A, 8% , 4)

= $90,636.99 (1.3605) - $26,640 (4.5061)
= $3,269.12

17. An individual makes six annual deposits of

$2,000 in a savings account that pays interest at a
rate of 4% compounded annually. Two years after
making the last deposit, the interest rate changes
to 7% compounded annually. Twelve years after
the last deposit, the accumulated money is
withdrawn from the account. How much is
withdrawn,

4-40 A woman arranges to repay $1,000 bank loan in

10 equal payments at a 10% effective annual
interest rate. Immediately after her third payment,
she borrows another $500, also at 10% per year.
When she borrows the $500, she talks the banker
into letting her repay the remaining debt of the first
loan and the entire amount of the second loan in 12
equal annual payments. The first of these
payments would be one year after she receives the
$500. Compute the amount of each of payments.

4-38 Using time = 0 as the reference point, set

P0(LHS) = P0(RHS):
$2,000(P/F,8%,2) + $5,000(P/F,8%,6)
Z(P/F,8%,4) - 2Z(P/F,8%,5)+ 3Z(P/F,8%,6)
$2,000(0.8573) + $5,000(0.6302) =
Z(0.7350) - 2Z(0.6806) + 3Z(0.6302)
$4,865.6 = 1.2644 Z
Z
= $3,848.15

UNIFORM GRADIENT SERIES OF CASH FLOWS

Arithmetic gradient series is a series of payments
in which each payment is greater than or less
than previous one by a constant amount G
0

G
2G
3G

(n-1)G

1.
Determine the equivalent present worth, future
worth and uniform annual worth of the following
cash flow diagram. The interest rate is 15% per
year compounded semiannually.
0

1
2000

7 EOY

2500
3000
3500
5000

2.
3.
Land is purchased for $25,000. It is agreed that
land will be paid over a five year period with annual
payments and using a 12% annual compound interest
rate. Each payment is to be $2000 greater than the
previous payment. Determine the size of the last
payment.

4.
A company borrows P25,000 at an interest rate
of 15% compounded annually with the agreement
that the loan will be repaid in 8 installments. The
repayment scheme will be such that each payment
will be P600 larger than the preceding one, with
the first payment to be made 3 years after the loan
is negotiated. Determine the amount of the third
payment?

5.
A company must make a license payment for a
process that they have adopted for a new plant.
The payment will begin at P10,000, and the first
payment is expected to be made 3 years from the
present when the plant is completed and in
production. Payment will be made every three
months hereafter, and the license payments are
expected to increase by P500 each quarter. What
single present amount is equivalent to the series of
license payments made over an 8-year period if
the interest rate is 8% compounded quarterly?

6.
Mr. Smith borrows P45,000 at 10% compounded
bi-monthly, he pays a 7 year period with semiannual
payments. Each successive payment P200 greater
than each of the previous payments. If the first
payment starts the 2nd year how much was the first
payment? The last payment?
7.
An increasing annual uniform gradient series
begins at the end of the second year and ends after
the fifteenth year. What is the value of the gradient G
that makes the gradient series equivalent to a
uniform flow of payments of P900 per year for 7
years at 12% per year compounded semiannually?

8. Suppose that the parents of young child decide to

make annua deposits into a savings accoun, with
the first deposit being made on the childs 5 th
birthday and the last deposit being made on the 15 th
birthday. Then starting on the childs 18 th , 19th, 20th ,
21st birthday, the withdrawals of $2000, $2400,
$2800 and $3200 are to be made respectively. If
the effective annual interest rate is 8% during this
period of time, what are the annual deposits in
years 5 though 15? Use uniform gradient amount in
your solution

8.

A
= [$2,000 (P/A,8%,4) + $400 (P/G,8%,4)]
(P/F,8%,2) (A/F,8%,11)
= [$2,000 (3.3121) + $400 (4.650)] (0.8573)
(0.0601) = $437.14

4-62 Equivalent cash outflows = Equivalent cash inflows

Using time 9 as the reference point, set
F9(outflows) = F9(inflows)
A(F/A,8%,5) = [$400(P/A,8%,4)-$100(P/G,8%,4)](F/P,8%,10)
+ $500(F/A,8%,3)
A(5.8666) = [$400(3.3121) - $100(4.65)](2.1589) +
$500(3.2464)

A(5.8666)
= $3,479.51

A
= $593.10

GEOMETRIC SERIES OF CASH FLOWS

Geometric gradient series is series of payments
where annual payments increase or decrease over
time, by a constant percentage.
An
An-1
A1

A2

A3

n-1

1.
Consider the end-of-year geometric sequence
of cash flows in the figure and determine the P, A,
A0, and F equivalent values. The rate of increase
is 15% per year after the first year, and annual
interest rate is 20%.
2.
Suppose that the salary for a recent graduate
is expected to increase by 12% per year from a
base of P32,000 over the next five years. If the
interest rate is expected to be 10% per year
compounded annually find the present worth of the
said earnings.

3.
Suppose that a shallow oil well is expected to
produce 12,000 barrels of oil during its first year at
P21 per barrel. If its yield is expected to decrease
by 10% per year over the next seven years, what is
the present worth of the anticipated gross
revenue? The interest rate is 17% per year
compounded annually.
4.
In a geometric sequence of annual cash flows
starting at end of year zero, the value of A0 is
P1,304.35. The value of the last term in the series,
A10, is P5,276.82. What is the equivalent value of
A1-10 ? Let i= 20% per year compounded annually?

5.
An End of Year (EOY) geometric gradient lasts
for 10 years, whose initial value at EOY three is
$5,000 and f = 6.04% per year thereafter. Find the
equivalent uniform gradient amount (G) over the
same time period if the initial value of the uniform
gradient at EOY one is $4,000. The interest rate is
8% nominal, compounded semiannually.

PERPETUITIES AND CAPITALIZED COSTS

A perpetuity is an annuity where the periodic

payments (withdrawals) continue indefinitely.
0

3
A ( perpetuity)

P is the capitalized value of A

A capitalized costs of any property is the sum of

the first cost and present worth of all costs of
replacement, operation and/or maintenance for a
long time or forever.

1.

I f the fund pays 12% compounded annually, what

deposit is required today such that P1000 be
withdrawn every year forever?

2. Find the present value of a perpetuity of P780

payable at the end of each year if money is worth
(a) 6% effective (b) 6% compounded
semiannually, (c) 6% compounded quarterly.
3. The XYZ Company is expected to pay P50 every
6 months indefinitely on a share of its preferred
stock. If money is worth 65 per year compounded
continuously to Co. B, what should be willing to
pay for a share of the stock?

4.
What is the capitalized cost of a structure that
will require construction cost of P1,000,000
immediately and P80,000 each year for the next 4
years and annual year end maintenance of
P36,000 plus the expenditure of P200,000 at the
end of each 10 year period for replacement?
Assume a 12% interest rate per year compounded
bimonthly?
5.
A manufacturing plant installed a new boiler at a
total cost of P150,000 and is estimated to have a
useful life of 10 years. It is estimated to have a
scrap value at the end of its useful life of P5,000. If
the interest rate is 10% compounded semiannually,
determine its capitalized cost.

6.
A woman is considering giving an endowment to a
university in order to provide payments of P5,000,
P4,000, P3,000, and P2,000, respectively, at the end
of the first, second, third and fourth quarters during a
year. If the interest rate is 12% compounded
quarterly, what is the capitalized equivalent that must
be deposited now so that the quarterly payment can
be repeated forever?
7.
A firm can invest in a venture which cost
P200,000 and returns P120,000 per year at the end
of each year for 4 years. This investment can be
renewed perpetually every 4 years. If the firms rate of
return is 20% per year compounded annually,
determine the capitalized worth of an infinite series of
this investment.