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Financial Calculations Guide

The document discusses cash flow diagrams and equations for calculating cash flows over time that account for interest. It provides an example of using a cash flow diagram to show a loan becoming $1,500 after 5 years at 10% simple interest. It also gives an example of using equations to calculate the final payment of $792,576 on an installment plan to pay $1,000,000 over 5 years at 20% interest with payments made at years 1, 3, and 5. Finally, it compares the accumulated amounts after 5 years investing $1,000 at 10% compounded annually, semi-annually, quarterly, monthly, daily, and continuously.

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Christine Joy Remegio
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205 views3 pages

Financial Calculations Guide

The document discusses cash flow diagrams and equations for calculating cash flows over time that account for interest. It provides an example of using a cash flow diagram to show a loan becoming $1,500 after 5 years at 10% simple interest. It also gives an example of using equations to calculate the final payment of $792,576 on an installment plan to pay $1,000,000 over 5 years at 20% interest with payments made at years 1, 3, and 5. Finally, it compares the accumulated amounts after 5 years investing $1,000 at 10% compounded annually, semi-annually, quarterly, monthly, daily, and continuously.

Uploaded by

Christine Joy Remegio
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Cash Flow Diagram

is a simple graphical representation of cash flows drawn on a time scale. It is used to simplify problems
having diverse receipts and disbursements.

Example:
A loan of PhP 1,000 at simple interest of 10% will become PhP 1,500 after 5 years.

EQUATION VALUE
is obtained by setting the sum of the values of a certain comparison / data to a single date point (known as
the time reference).

Example:

A man bought a lot worth PhP 1,000,000 if paid in cash. On an instalment basis, he paid a
downpayment of PhP 200,000; PhP 300,000 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 the interest was 20%?
Given:
Let:

A – Actual price (worth) = PhP 1,000,000.00


DP – Down Payment = PhP 200,000.00
P – present worth
P1 – end of 1st year payment F1 = PhP 300,000.00 n=1
P3 – end of 3rd year payment F3 = PhP 400,000.00 n=3
P5 – end of 5th year payment F5 = ? n=5
i = 20%

Required: future payment at the end of 5th year, F5

Solution:

P = P1 + P3 + P5

[A = P + DP]; P = A – DP
[F = P(1+i)n] ; P = F/(1+i)n

F1 F3 F5
A – DP = n + n + n
(1+i) (1+i) (1+i)

300,000 400,000 F5
1,000,000 – 200,000 = 1 + 3 +
(1+0.20) (1+0.20) (1+0.20)5

F5
800,000 = 250,000 + 231,481.48 +
2.48832

F5
= 800,000 – 250,000 – 231,481.48
2.48832

F5 = (2.48832) (318,518.52)

F5 = PhP 792,576.00 ans.

CONTINUOUS COMPOUNDING AND DISCRETE PAYMENTS

In discrete compounding, the interest is compounded at the end of each finite – length period such
as month, quarter or a year. It is assumed that cash payment is done once a year but the compounding is
continuous throughout the year.

F = P 𝑒r(n)
Example:

Compare the accumulated amounts after 5 years of PhP 1,000 invested at a rate of 10% per year
compounded (a) annually, (b) semi-annually, (c) quarterly, (d) monthly, (e) daily, and (f) continuously.

Given: P = PhP 1,000.00 r = 10% n = 5 years


m1 = 1 m2 = 2 m4 =4 m12 = 12 m365 = 365 me = e

Required: a.) F1 b.) F2 c.) F4 d.) F12 e.) F365 f.) Fe

Solution:

Using the formula: F = P(1+r/m)nm

a. F1 = P(1+r/m)nm = 1,000(1+0.10/1)5(1) = PhP 1,610.51


b. F2 = P(1+r/m)nm = 1,000(1+0.10/2)5(2) = 1,000(1+0.05)10 = PhP 1,628.89
c. F4 = P(1+r/m)nm = 1,000(1+0.10/4)5(4) = 1,000(1+0.025)20 = PhP 1,638.62
d. F12 = P(1+r/m)nm = 1,000(1+0.10/12)5(12) = 1,000(1+0.008333333)60 = PhP 1,645.31
e. F365 = P(1+r/m)nm = 1,000(1+0.10/365)5(365) = 1,000(1+0.00027397)1,825 = PhP 1,648.61
f. Fe = Per(n) = 1,000e0.10(5) = PhP1,648.72

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