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Example 2 (P.

103)

5. PAYMENTS

X remains the same since it is neither accumulated not discounted as the CD is


on the 5th year.

X(1 + 7%)0 = X

Then set up the equation of the value and solve for the unknown X.

Payments = debts

X = P5,000(1 + 7%)4 + P8,000(1 + 7%)-4

X = P5,000(1.310796) + P8,000(0.7628952)

= P6,553.98 + P6103.16

= P12,657.14

Thus, the payment of P12,657.14 on the 5th year will equitably replace the
P5,000 debt due on the 3rd year and the P8,000 debt due on the 7th year.

Example 4

A man owes P7,500 due now. The lender agrees to let him pay his obligation with 2
equal payments due after 1 and 2 years. If money is worth 12%, m = 2, how
much would be his payment?

Example 2.11.2 – 2-Part Problem

A man owes P5,000 with a term of 3 years and interest of 10% compounded
quarterly, and P10,000 with a term of 5 years and interest of 12% compounded
semi- annually.

If the money is worth 8% quarterly, what single payment at the end of 6 years will
equitably replace these 2 debts?

Solution :

A. Part 1: Find the Future Values of the OLD obligations 5,000 and 10,000

Let F1 = the Future Value of P5,000 at year 3; AND


F2 = the Future Value of P10,000 at year 5

Given: F1 = ? F2 = ?
P1 = P5,000 P2 = P10,000
j1 = .10 j2 = .12
m1 = 4 m2 = 2
t1 = 3 t2 = 5

Solution: F1 = 5,000(1+.10/4)4(3) F2 = 10,000(1+.12/2)2(5)

= P5,000(1+.025)12 = P10,000(1 + 6%)10

= P5,000(1.3448888) = P10,000(1.7908477)

= P6,724.44 = P17,908.48

B. Part 2 – Set-up the Equation of Value using F1 and F2, j = .08 , m = 4.


Then solve for X.

Let the C.D. = year 6

Let X be the single payment on the 6th year.

Equation of Value:

X (1+.08/4)4(0) = 6,724(1+.08/4)(4)(3) + 17,908(1+.08/4)(4)(1)

X = P27,911.85

4. A man owes the following obligations:

a. P6,000 due at the end of 3 years, and

b. P3,000 due in 6 years w/ accumulated interest from today at 14%, m =


4.

If the man was allowed to replace these obligations by a payment of P5,000


on the 2nd year and another payment at the end of 5 years, how much is the 2nd
payment if money is worth 16%, m = 2? Use the 5th year as the Comparison Date.

Example 2.11.5

Instead of taking P300,000 cash from an insurance policy, a beneficiary


chooses to take three equal annual payments, the first to be made now. If the
insurance company pays 8% effective on money left with them, what is the size of
the payments?