Financial Management (ECC 319) (Enhanced by Sir Ariel Lecias, 2025) Page 1 of 6
WEEK 10: Present Value of Several Amounts
Week 10: Present Value of Several Amounts
III. LESSON PROPER:
PRESENT VALUE OF SEVERAL AMOUNTS (ANNUITY DUE)
In finding the present value of an annuity due, you merely reverse the treatment for the future value of
an annuity due. The present value of an annuity due is similar to an ordinary annuity. The only difference is
that in annuity due, the period on which amounts are received or paid at the beginning of the year. The
present value of annuity occurs when you would like to determine the present value of a series of amounts
you will receive or pay in the future. Theoretically, the present value of an annuity due is the sum of all the
present values of ₱1.0 in a series of amounts that you will receive or pay at the beginning of each year in the
future.
Illustrative Example: Let us use the example from the ordinary annuity.
Assume that on January 1 of the current year, Keith Corporation sold its equipment costing ₱500,000
for ₱800,000 to Arvin Corporation. Arvin paid ₱200,000 as a down payment, and the balance was paid with
a non-interest-bearing note for ₱600,000. The note shall be paid in equal annual installments (this is the
series of amounts that Keith will receive in the future) at the beginning of each year, amounting to
₱200,000/year. The prevailing interest rate for this type of note is 10%. Keith Corporation has tasked you
with the present value of the note receivable to the company.
Long method:
Table of Computation
Series of future
PV Factor of ₱1.0 at PV of ₱1.0 for
Period values to be
1096 each amount
received by Keith
Beg. - 1st yr ₱200,000 1.0000 ₱200,000
Beg. - 2nd yr ₱200,000 0.9091 181,820
Beg. - 3rd yr. ₱200,000 0.8264 165,280
PV of Ordinary Annuity Factor
2.7355 ₱547,100
Present Value Ordinary Annuity
Short Method:
Applying the formula:
𝑃𝑉 𝑜𝑟 𝐴𝐷 = 𝑆𝑒𝑟𝑖𝑒𝑠 𝑜𝑓 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒𝑠 𝑜𝑓 𝑎𝑚𝑜𝑢𝑛𝑡𝑠 𝑡𝑜 𝑏𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑜𝑟 𝑝𝑎𝑖𝑑
× 𝑃𝑉 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 𝑓𝑎𝑐𝑡𝑜𝑟𝑠
= ₱200 ,000 × 2.7355
= ₱547 ,1000
COMPUTING THE PRESENT VALUE OF ANNUITY DUE FACTOR (PVADF) USING A REGULAR
CALCULATOR
The PVADF can be determined using the PVF Table provided in the appendix of this book or by adding
the present value factors of ₱1.0 as seen in Table 5. A direct and shorter way of determining the factor would
be through the use of a regular calculator. The following steps may be used:
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WEEK 10: Present Value of Several Amounts
Using our example type 1.10.
Type 1.0 and then press mt - this is the PVF of ₱1 for the beginning of the 1st year.
Type in 1.10 then / or division symbol twice.
Press the result will be 0.9091. - This is the PVF of ₱1.0 for the beginning of the 2nd year.
Press "ma.”
Press "=" the result will be 0.8264 - this is the PVF of ₱1.0 for the beginning of the 3rd year.
Press "mr" or memory recall. The result will be 2.8355 - this is the PV of the annuity due factor.
PERPETUITIES
In computing for annuities, the payments or receipts are to be made over some predetermined time
frame. This can be seen in the examples we have studied. However, s ome annuities may go on indefinitely
or perpetually. This type of annuity is referred to as perpetuities:
The formula to compute perpetuities is:
𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝑃𝑉 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒
Example:
Assume that the Philippine government sold small-denominated bonds in 1980. Assume further that
these bonds remain floating up to the present. In 2010, the go vernment sold huge bonds to pay off the smaller
bond issues they made in the 80s. The purpose of issuing a huge amount of bonds is to consolidate the
government's past debts due to the smaller bonds. Assume that each consolidation promised to pay
₱100,000 per year in perpetuity. How much would each bond be worth if the discount rate is, was 10%?
15%? 20%?
@10%
𝑃100 ,000
𝑃𝑉 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 = = ₱𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎
10%
@ 15%
𝑃100 ,000
𝑃𝑉 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 = = ₱𝟔𝟔𝟔, 𝟔𝟔𝟕
15%
@20%
𝑃100 ,000
𝑃𝑉 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 = = ₱𝟓𝟎𝟎, 𝟎𝟎𝟎
20%
It can be observed that the value of the perpetuity significantly varies when the interest rate is changed.
There is an indirectly proportional relationship between the interest rate and the PV perpetuity.
PRESENT VALUE OF COMPLEX STREAMS
If you notice in the previous examples, the payments or receipts involved are constant or the same for
a given period. However, not all situations involve several equal/even amounts or an annuity. The investment
proposal or payments may affect uneven amounts/cash flows. For instance, investment in securities would
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WEEK 10: Present Value of Several Amounts
not necessarily yield uniform dividend income per year or property investments. Plant and equi pment would
not typically yield constant inflows (receipts) of cash per year. Sometimes the payments/receipts may involve
uneven cash flow in the first three years, and from the 4th year to the succeeding years, an annuity or an
even cash flow is paid/received.
The question is - How do we compute the present Value or future Value of uneven cash payment or
receipts or uneven cash flows? This can be answered by the example provided below.
Illustrative Example 1:
Assume the following annual payments of notes payable of Blanche Company with an 8% discount
rate:
Series of future values of
PV Factor of ₱1.0 at PV of ₱1.0 for
Period amounts to be paid by
8% each amount
Blanche Co.
1st yr ₱200,000 0.9259 ₱185,180
2nd yr ₱250,000 0.8573 214,325
3rd yr. ₱300,000 0.7938 238,140
4th yr ₱375,000 0.735 275,625
Total present value of uneven cash flows ₱913,270
In this case, you can see that the present value of one is computed for each cash payment to come
up with the PV of uneven cash flows. The present values of ₱1.0 are then added to come up with the annuity.
Illustrative Example 2:
Assume the following annual payments of notes payable of Dorothy Company with discount rate. What
is the present value of the annual payments? Consider the data below:
Series of future values of amounts to be paid by
Period
Dorothy Co.
1st yr. ₱ 200,000
2nd yr. 250,000
3rd yr. 300,000
4th yr. 375,000
5th yr. 375,000
6th yr. 375,000
7th yr. 375,000
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WEEK 10: Present Value of Several Amounts
Solution: Method 1
Series of future values of amounts to PV of ₱1.0 for
Period PV Factor of ₱1.0 at 8%
be paid by Dorothy Co. each amount
1st yr. ₱ 200,000 0.9259 ₱ 185,180
2nd yr. 250,000 0.8573 214,325
3rd yr 300,000 0.7938 238,140
4th yr 375,000 0.735 275,625
5th yr. 375,000 0.6805 255,188
6th yr: 375,000 0.6302 236,325
7th yr. 375,000 0.5835 218,813
Present value of cash flows ₱ 1,623,596
Alternative method 2:
Series of future values of amounts to be PVF of ₱1.0 and
Period Present Value
paid by Dorothy Co. PVA at 8%
1st yr. ₱ 200,000 0.9259 ₱ 185,180
2nd yr. 250,000 0.8573 214,325
3rd yr 300,000 0.7938 238,140
4th yr 375,000 2.6292*
5th yr. 375,000
985,951
6th yr: 375,000
7th yr. 375,000
Present value of cash flows ₱ 1,623,596
*2.6292 = 0.7350 + 0.680S +0.6302 +0.5835
Alternative method 3:
For the first three years, follow the same procedure as method 1 and 2 but for the 4th year, use the
procedure below:
PV (4th year) = FV X PVAF of 8% for the four years x PVF of ₱1.0 of 8% for the 3rd yr.
= ₱375,000 x 3.312 x 0.7938
= ₱985,900
PV = ₱185,180 + ₱214,325 + ₱238,140 + ₱985,900
= ₱1,623,545
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WEEK 10: Present Value of Several Amounts
Alternative method 4:
Steps:
1. Determine the PVAF of 8% for 8 yrs. (use table or calculator) = 5.2063
2. Determine the PVAD of 89% for 3 yrs. (7 yrs.-4 yrs.) = 2.5771
3. Get the difference between steps 1 and 2= 5.2063 - 2.5771 = 2.6292
4. Compute the PVA of ₱375,000 = ₱375,000 x 2.6292 = P985,950
5. Compute the PV = ₱185,180 + ₱214,325 + ₱238,140 + ₱985,950 = ₱1,623,595
Note: There will be a few peso differences due to rounding off factors.
FUTURE VALUE OF UNEVEN CASH PAYMENT OR RECEIPTS (CASH FLOWS)
The future value of an uneven cash payment/receipt is sometimes referred to as terminal Value. This
can be computed by compounding each payment/receipt each year and adding all the future values.
Illustrative example:
Assume that Rose Company is to invest uneven cash payments for four years. The interest for this
investment was pegged at 9%. The investment is made every year-end. What is the future value of this
annuity? Consider the data below:
Period Amount Invested
Dec. 31 - 4th yr. ₱200,000
December 31 - 3rd yr. ₱250,000
Dec. 31- 2nd yr. ₱300,000
Dec. 31 - 1st yr. ₱325,000
Solution:
Period Amount Invested FV Factor of ₱1.0 Future Value
Dec. 31 - 4th yr. ₱200,000 1 ₱ 200,000
December 31 - 3rd yr. ₱250,000 1.09 272,500
Dec. 31- 2nd yr. ₱300,000 1.1881 356,430
Dec. 31 - 1st yr. ₱325,000 1.295 420,875
Future Value of Cash flows ₱1,249,805
The future cash flow value is computed by multiplying the FV factor of ₱1.0 for every cash flow made
during each year. The results are then added to calculate the future value of cash flows for the entire
investment.
VARIED COMPOUNDING PERIODS
The examples presented so far involved compounding or discounting interest rates annually. However,
there are financial contracts like acquisitions on an installment basis or corporate bond contracts requiring
semi-annual, quarterly, or monthly compounding periods.
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WEEK 10: Present Value of Several Amounts
Under these situations, we compute:
Period = number of yearsx 2 (semiannual)
x 4 (quarterly)
x 12 (monthly)
Interest = interest rate / 2 (semiannual)
/ 4 (quarterly)
/ 12 (monthly)
Example:
Find the future value of Sophia Corporation with a ₱100,000 investment. The investment is suitable for
five years with 6% annual interest. Assume that the investment is compounded semi-annually.
Period = 5 x 2 = 10
Interest = 6% / 2 = 3%
In computing for the future value factor (FVF), you will be using a 3% rate, and the period is not five
periods but ten periods. Based on the new period and interest rate, the FVF is 10.78.
Future value = ₱100,000 x 10.78
= ₱1,078,000