General Mathematics

MATH 01
Senior High School
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 General Mathematics

Meaning of Interest
From the viewpoint of the borrower, interest is the amount of money paid for
the use of borrowed capital. For the lender, interest is the income by the money
which he has lent.
The charging of interest is justified from the standpoint of the lender, because
he has to forego the use of his money during the time it is borrowed, and to
compensate him also for the risk which he has to take in lending his money. From the
borrower’s viewpoint, it is usually advantageous to borrow money if in so doing he
will be able to earn more than the interest which he has to pay.
 General Mathematics

Simple Interest The formula for Simple Interest is:

The interest on borrowed money
is said to be simple interest if the 𝑰 = 𝑷𝒓𝒕
interest to be paid is directly where:
proportional to the length of time the
𝑰, total interest earned by the principal
amount or principal is borrowed. The
principal is the amount of money 𝑷, amount of the principal
borrowed and on which interest is 𝒓, rate of interest expressed in decimal
charged. The rate of interest is the form
amount earned by one unit of principal
𝒕, number of interest periods
during a unit of time.
 General Mathematics

The total amount 𝑭(𝒕) to be repaid is equal to the

sum of the principal and the total interest and is given
by the formula:

𝑭(𝒕) = 𝑷 + 𝑰
𝑭(𝒕) = 𝑷 + 𝑷𝒓𝒕
𝑭(𝒕) = 𝑷(𝟏 + 𝒓𝒕)

Then therefore, 𝑭 𝒕 , future amount function

resembles a linear function for a simple interest with
slope of 𝒎 = 𝑷𝒓 and y-intercept as 𝑷.
 General Mathematics

Ordinary Simple Interest

Ordinary Simple Interest is computed on the basis of one banker’s year, which is

1 banker’s year = 12 months

1 month = 30 days
1 banker’s year = (12 mos.)(30 days) = 360 days
 General Mathematics

Problem 1. Determine the ordinary simple interest on P 10,000 for 9 months and 10
days if the rate of interest is 12%.

Solution.
Based on Banker’s Year, 9 months and 10 days = 9(30) + 10 = 280 days
𝐼 = 𝑃𝑟𝑡
280
𝐼 = 𝑃 10,000 0.12
360
𝑰 = 𝑷 𝟗𝟑𝟑. 𝟑𝟑
 General Mathematics

Exact Simple Interest

Exact Simple Interest is based on the exact number of days, 365 for an ordinary
year and 366 days for a leap year. The leap years are those which are exactly divisible
by 4, but for the century years, it needs to be divisible by 400.
If 𝒅 is the number of days in the interest period, then
𝒅
𝑶𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝑺𝒊𝒎𝒑𝒍𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 = 𝑷𝒓
𝟑𝟔𝟎
𝒅
𝑬𝒙𝒂𝒄𝒕 𝑺𝒊𝒎𝒑𝒍𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 = 𝑷𝒓 , 𝒇𝒐𝒓 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒚𝒆𝒂𝒓
𝟑𝟔𝟓
𝒅
𝑬𝒙𝒂𝒄𝒕 𝑺𝒊𝒎𝒑𝒍𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 = 𝑷𝒓 , 𝒇𝒐𝒓 𝒂 𝒍𝒆𝒂𝒑 𝒚𝒆𝒂𝒓
𝟑𝟔𝟔
 General Mathematics

Problem 2. Determine the ordinary

January 15 – 31 16 days (ex. Jan 15)
and exact simple interests on P 5,000
for the period from January 15, 2017 February 28 days
to June 20, 2017, if the rate of simple March 31 days
interest is 14%.
April 30 days
May 31 days
Solution.
June 1 – 20 20 days (inc. Jun 20)
First, determine the number of days
Total 156 days
in the given period.
 General Mathematics

Problem 2. Determine the ordinary

and exact simple interests on P 5,000 𝑰 = 𝑷𝒓𝒕
for the period from January 15, 2017 156
to June 20, 2017, if the rate of simple 𝑂𝑆𝐼 = 𝑃 5,000 0.14
interest is 14%. 360
𝑶𝑺𝑰 = 𝑷 𝟑𝟎𝟑. 𝟑𝟑
Solution.
Next, compute for interests. Use 360 156
days for ordinary and 365 days for 𝐸𝑆𝐼 = 𝑃 5,000 0.14
365
exact simple interest. 2017 is a 𝑬𝑺𝑰 = 𝑷 𝟐𝟗𝟗. 𝟏𝟖
regular year.
 General Mathematics

Problem 3. Determine the total 2016 2017

amount to be repaid on P 1,200 for the June 16 – 31 15 January 31
period from June 16, 2016 to February
26, 2017, if the exact simple interest July 31 February 26
rate is 24%. August 31 Total 57
September 30
Solution. First, determine the number
of days in the given period. The October 31
number of days for the given period is November 30
computed as follows noting that the December 31
year 2016 is a leap year and 2017 is
not. Total 199
 General Mathematics

Problem 3. Determine the total 𝑨 𝑩

𝒕= +
amount to be repaid on P 1,200 for the 𝟑𝟔𝟔 𝟑𝟔𝟓
period from June 16, 2016 to February
26, 2017, if the exact simple interest Where 𝐴 is the number of days under a
rate is 24%. leap year, and 𝐵 is the number of days
under an ordinary year.
Solution. 𝐹 = 𝑃 1 + 𝑟𝑡 where 𝑡 there
𝐹 = 𝑃(1 + 𝑟𝑡)
is number of interest periods. In a case
where the payment period passes
199 57
through a leap year, 𝑡 should be stated 𝐹 = 𝑃 1,200 1 + 0.24 +
as … 366 365

𝑭 = 𝑷 𝟏, 𝟒𝟎𝟏. 𝟓𝟕
 General Mathematics

Problem 4. A man borrows P 6,400 from a loan association. In repaying this debt he
has to pay P 400 at the end of every three months on the principal and a simple
interest of 16% on the principal outstanding at that time. Determine the total
amount he has paid after paying all his debt.
Solution. Note that the interest rate is Given that there are 4 ends of every three
16% and the method of payment is at months in a year. Aside from that,
the end of every three months. It 𝑃 6400
implies that, 𝑡= = 𝟏𝟔 𝒆𝒏𝒅𝒔 𝒐𝒇
𝑃 400
𝒆𝒗𝒆𝒓𝒚 𝟑 𝒎𝒐𝒏𝒕𝒉𝒔
0.16 In the eyes of both borrower and the
𝑟= = 𝟒%
4 lender, this has to be paid in 16 periods.
 General Mathematics

Problem 4. A man borrows P 6,400 from a loan association. In repaying this debt he
has to pay P 400 at the end of every three months on the principal and a simple
interest of 16% on the principal outstanding at that time. Determine the total
amount he has paid after paying all his debt.

Solution. Since 𝐼 = 𝑃𝑟𝑡,

After the first payment, 𝐼1 = 𝑃 400 0.04 1 = 𝑃 16.00
After the second payment, 𝐼2 = 𝑃 400 0.04 2 = 𝑃 32.00
After the third payment, 𝐼3 = 𝑃 400 0.04 3 = 𝑃 48.00
… …
At the final payment, 𝐼16 = 𝑃 400 0.04 16 = 𝑃 256.00
 General Mathematics

Problem 4. A man borrows P 6,400 from a loan association. In repaying this debt he
has to pay P 400 at the end of every three months on the principal and a simple
interest of 16% on the principal outstanding at that time. Determine the total
amount he has paid after paying all his debt.

Solution. The interest accrued from the first to the last payment is at arithmetic
progression with 𝑎1 = 𝑃 16.00, 𝑎16 = 𝑃 256.00 𝑛 = 16, and 𝑑 = 𝑃 16.00. 𝐼𝑡
therefore is the sum of arithmetic progression.
𝐹 = 𝑃 + 𝐼𝑡
16
𝐹 = 𝑃 6,400 + 2 𝑃 16.00 + 𝑃 16.00 15
2
𝑭 = 𝑷 𝟖, 𝟓𝟕𝟔. 𝟎𝟎
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 General Mathematics

Discount
Discount on a negotiable paper is the difference between what it is worth in
the future and its present worth.

𝐷 =𝐹−𝑃

Where 𝐹 is the future value and 𝑃 is the present value. For example, if a negotiable
paper such as a bond can be sold for P 1000, six months from now, but it is sold for P
850 at present, then the discount is P 150.
 General Mathematics

Discount
The rate of discount 𝒅 is the discount 1
on one unit of principal per unit of 𝑟= −1
time, such that 𝐷 = 𝑑𝐹. On a basis of 1−𝑑
1 year, 𝑑𝐹 = 𝐹 − 𝑃.
1−1+𝑑
𝑟=
1−𝑑
𝐹 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 = 𝐹(𝑜𝑓 𝑠𝑖𝑚𝑝𝑙𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
𝑃 𝒅
= 𝑃(1 + 𝑟𝑡) 𝒓=
1−𝑑
𝟏−𝒅
1
=1+𝑟
1−𝑑
 General Mathematics

Problem 5. A man borrows P 10,000 from a loan firm. The rate of simple interest is
15% but the interest is to be deducted from the loan at the time the money is
borrowed. At the end of one year, he has to pay back P 10,000. What is the actual
rate of interest?
Solution. 𝑷 = 𝑭(𝟏 − 𝒅) Using the formula derived,
𝑃 = 𝑃 10,000 1 − 0.15 = 𝑃 8,500 𝑑
𝑖=
𝑭 = 𝑷 𝟏 + 𝒓𝒕 1−𝑑
𝑃 10,000 = 𝑃 8,500 1 + 𝑖 1 0.15
𝑖=
10000 1 − 0.15
=1+𝑖
8500 𝒊 = 𝟏𝟕. 𝟔𝟓%
𝒊 = 𝟏𝟕. 𝟔𝟓%
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 General Mathematics

Compound Interest Given that 𝑃 = 𝑃 3,000

In compound interest, the after 1 year, with 𝑖 = 12% effective,
interest earned by the principal is not 𝐼 1 = 𝑃 3,000 0.12 = 𝑃 360
paid at the end of each interest period, 𝐹 1 = 𝑃 3,000 + 𝑃 360
but is considered as added to the 𝑭(𝟏) = 𝑷 𝟑, 𝟑𝟔𝟎
principal, and therefore will also earn
interest for the succeeding periods. The after 2 years,
interest earned by the principal when 𝐼 2 = 𝑷 𝟑, 𝟑𝟔𝟎 0.12 = 𝑃 403.20
invested at compound interest is much 𝐹 2 = 𝑃 3,360 + 𝑃403.20
more than that earned by the principal 𝑭(𝟐) = 𝑷𝟑𝟕𝟔𝟑. 𝟐𝟎
when invested at simple interest for the
same number of periods.
 General Mathematics

Compound Interest

The formula for F, which is the future

worth of P in compound interest, which
resembles an exponential function is,

𝐹 =𝑃 1+𝑖 𝑛

The factor 𝟏 + 𝒊 𝒏 is called Single Payment

Compound Amount Factor.
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 General Mathematics

Nominal and Effective Rate of Interest

For compound interest, the rate is usually quoted as nominal rate of interest
which specifies the rate of interest and the number of interest periods per year. Thus,
a nominal rate of interest of “8% compounded quarterly” means that there are 4
interest periods each year, the rate per period being 8%/4 = 2%. In this case 𝑖 = 0.02.
The effective rate of interest is the actual rate of interest on the principal for one
year. It is equal to the nominal rate if the interest is compounded annually, but
greater than the nominal rate if the number of interest periods per year exceeds one,
such as for interest compounded semi-annually, quarterly or monthly.
 General Mathematics

Nominal and Effective Rate of Interest

Nominal Rate of Interest commonly used: (from the basis of 𝒎 years)
12𝑚
𝑖 𝑖
𝑖% compounded monthly 𝑖𝑛 = 𝐹 =𝑃 1+
12 12
6𝑚
𝑖 𝑖
𝑖% compounded bimonthly 𝑖𝑛 = 𝐹 =𝑃 1+
6 6
4𝑚
𝑖 𝑖
𝑖% compounded quarterly 𝑖𝑛 = 𝐹 =𝑃 1+
4 4
2𝑚
𝑖% compounded semi- 𝑖 𝑖
annually 𝑖𝑛 = 𝐹 =𝑃 1+
2 2
 General Mathematics

Nominal and Effective Rate of Interest

For a basis of 1 year,
𝐹 𝑤𝑖𝑡ℎ 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 = 𝐹 𝑤𝑖𝑡ℎ 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑚
𝑖
𝑃 1+ = 𝑃 1 + 𝑖𝑒𝑓𝑓
𝑚
𝑚
𝑖
1+ = 1 + 𝑖𝑒𝑓𝑓
𝑚
𝒎
𝒊
𝒊𝒆𝒇𝒇 = 𝟏+ −𝟏
𝒎
 General Mathematics

Problem 6. If the sum of P 12,000 is deposited in an account earning interest at

the rate of 9% compounded quarterly, what will it become at the end of 8
years?

Solution:
𝐹 =𝑃 1+𝑖 𝑛
(8)(4)
0.09
𝐹 = 𝑃 12,000 1 +
4
𝑭 = 𝑷 𝟐𝟒, 𝟒𝟓𝟕. 𝟐𝟒
 General Mathematics

Problem 7. At a certain interest rate compounded quarterly, P 1,000 will

amount to P 4,500 in 15 years. Find the following:
a. the nominal interest rate.
b. the amount at the end of 10 years
Solution: 60 9 𝑖
a. 𝐹 = 𝑃 1 + 𝑖 𝑛 =1+
15 4 2 4
𝑖
𝑃 4,500 = 𝑃 1,500 1 +
4 60 9
60
𝑖= −1 4
4,500 𝑖 2
= 1+
1,000 4 𝒊 = 𝟏𝟎. 𝟏𝟓% 𝑪. 𝑸𝒖𝒂𝒓𝒕𝒆𝒓𝒍𝒚
 General Mathematics

Problem 7. At a certain interest rate compounded quarterly, P 1,000 will

amount to P 4,500 in 15 years. Find the following:
a. the nominal interest rate.
b. the amount at the end of 10 years
Solution:
𝑛
b. 𝐹 =𝑃 1+𝑖
10 4
0.1015
𝐹 = 𝑃 1,000 1 +
4
𝑭 = 𝑷 𝟐, 𝟕𝟐𝟒. 𝟔𝟒
 General Mathematics

Time Value of Money

The principal 𝑃 in the formula 𝑭 = 𝑷 𝟏 + 𝒊 𝒏 may be considered as the
value of the compound amount 𝐹 at present, or it is the amount which when
invested now will become 𝐹 after n periods. 𝑃 is called the present value of the
amount 𝐹, and is given by the formula 𝑷 = 𝑭 𝟏 + 𝒊 −𝒏 .

−𝒏
• Use 𝟏 + 𝒊 as the factor to find the amount of money 𝑛 periods before.
• Use 𝟏 + 𝒊 𝒏 as the factor to find the amount of money after 𝑛 periods.
 General Mathematics

Problem 8. A man possesses a promissory note, due 3 years hence, whose

maturity value is P 6,700.48. If the rate of interest is 10% compounded semi-
annually, what is the value of this note now?

Solution: 𝑃 =𝐹 1+𝑖 −𝑛
−6
0.1
𝑃 = 𝑃 6,700.48 1 +
2
𝑷 = 𝑷 𝟓, 𝟎𝟎𝟎. 𝟎𝟎
 General Mathematics

Problem 9. What payment “x” 10 years from now is equivalent to a payment of

P 1,000 six years from now, if interest is 15% compounded
a. annually? and b. monthly?
Solution: Note that from “six years from 0.15 48
now” to “10 years from now”, it covers b. 𝑥 = 𝑃 1,000 1 +
12
an absolute number of 4 years. 𝒙 = 𝑷 𝟏, 𝟖𝟏𝟓. 𝟑𝟓
Therefore,

4
a. 𝑥 = 𝑃 1,000 1 + 0.15
𝒙 = 𝑷 𝟏, 𝟕𝟒𝟗. 𝟎𝟏
 General Mathematics

Problem 10. If P 2,000 becomes P

3,524.58 after 5 years when
invested at an unknown rate of
interest compounded bimonthly,
determine the unknown nominal
rate and the corresponding
effective rate.
 General Mathematics

Problem 10. If P 2,000 becomes P Solution:

𝑛
3,524.58 after 5 years when 𝐹 =𝑃 1+𝑖
(5)(6)
invested at an unknown rate of 𝑖
interest compounded bimonthly, 𝑃 3,524.58 = 𝑃 2,000 1 +
6
determine the unknown nominal 30
3524.58 𝑖
rate and the corresponding = 1+
effective rate. 2000 6

30 3524.58 𝑖
=1+
2000 6
𝒊 = 𝟏𝟏. 𝟒𝟒% Compounded Bimonthly
 General Mathematics

Problem 10. If P 2,000 becomes P Solution:

6
3,524.58 after 5 years when 0.1144
invested at an unknown rate of 𝑖𝑒𝑓𝑓 = 1+ −1
6
interest compounded bimonthly,
𝒊𝒆𝒇𝒇 = 𝟏𝟐%
determine the unknown nominal
rate and the corresponding
effective rate.
 Course Outcome 4 – MATH01
Discussion Topics

Simple and Compound Interest

Simple Interest
Ordinary Simple Interest
Exact Simple Interest
Discount
Compound Interest and Time Value of Money
Annual Percentage Yield
Nominal and Effective Rate of Interest
Cash Flow Analysis and Equation of Value
 General Mathematics

Cash Flow Diagrams

A cash-flow diagram is simply a graphical representation of cash flows drawn

on a time scale. Upward arrow is used for positive cash flow or cash inflow
and downward arrow for negative cash flow or cash outflow.

Equation of Value

An equation of value is obtained by setting the sum of the values on a certain

comparison or focal date of one set of obligations equal to the sum of the
values on the same date of another set of obligations.
 General Mathematics

Problem 11. Annual deposits were made in a fund earning 10% per annum.
The first deposit was P 2,000 and each deposit thereafter was P 200 less than
the preceding one. Determine the amount in the fund after the sixth deposit.
Solution:
Note: Cash flows represent money at
(1) Draw the cash flow diagram.
F
the end of each period. Broken-line
arrows represent as the total amount
1 2 3 4 5 6
0 of money accrued from multiple
deposits.
P 1,000
P 1,200
P 1,400
P 1,600
P 1,800
P 2,000
 General Mathematics

Problem 11. Annual deposits were made in a fund earning 10% per annum.
The first deposit was P 2,000 and each deposit thereafter was P 200 less than
the preceding one. Determine the amount in the fund after the sixth deposit.
Solution: At a focal date where 𝒏 = 𝟎,
(2) Choose a focal date. ෍ 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 = ෍ 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
F −6 −1
𝐹 1 + 0.1 = 𝑃 2,000 1 + 0.1 +
1 2 3 4 5 6 𝑃 1,800 1 + 0.1 −2 + 𝑃 1,600 1 + 0.1 −3
0
−4 −5
+𝑃 1,400 1 + 0.1 + 𝑃 1,200 1 + 0.1
P 1,000 −6
P 1,200 +𝑃 1,000 1 + 0.1
P 1,400
P 1,600
P 1,800
P 2,000 𝑭 = 𝑷 𝟏𝟐, 𝟎𝟎𝟎
 General Mathematics

Problem 11. Annual deposits were made in a fund earning 10% per annum.
The first deposit was P 2,000 and each deposit thereafter was P 200 less than
the preceding one. Determine the amount in the fund after the sixth deposit.
Solution: By checking, at a focal date where 𝒏 = 𝟔
(2) Choose a focal date. ෍ 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 = ෍ 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
F
5 4
𝐹 = 𝑃 2,000 1 + 0.1 + 𝑃 1,800 1 + 0.1
1 2 3 4 5 6
+𝑃 1,600 1 + 0.1 3 + 𝑃 1,400 1 + 0.1 2
0
+𝑃 1,200 1 + 0.1 1 + 𝑃 1,000
P 1,000
P 1,200
P 1,400
P 1,600
P 1,800 𝑭 = 𝑷 𝟏𝟐, 𝟎𝟎𝟎
P 2,000
 General Mathematics

Problem 11. Annual deposits were made in a fund earning 10% per annum.
The first deposit was P 2,000 and each deposit thereafter was P 200 less than
the preceding one. Determine the amount in the fund after the sixth deposit.
Solution: At a focal date where 𝒏 = 𝟑
(2) Choose a focal date. ෍ 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 = ෍ 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
F
−3 2
𝐹 1 + 0.1 = 𝑃 2,000 1 + 0.1 +
1 2 3 4 5 6
1 −1
0 𝑃 1,800 1 + 0.1 + 𝑃 1,600 + 𝑃 1,400 1 + 0.1
−2 −3
P 1,000 +𝑃 1,200 1 + 0.1 + 𝑃 1,000 1 + 0.1
P 1,200
P 1,400
P 1,600

P 2,000
P 1,800 𝑭 = 𝑷 𝟏𝟐, 𝟎𝟎𝟎
 General Mathematics

Problem 12. A man wishes to bequeath to his daughter P 20,000 ten years
from now. What amount should he invest now if it will earn interest of 8%
compounded annually during the first five years and 12% compounded
quarterly during the next five years?
Solution: Let 𝑷𝟏 be the value of 𝑷 𝟐𝟎, 𝟎𝟎𝟎 five
P 20,000 years from now.
𝑖 = 8% 𝑒𝑓𝑓 𝑖 = 12% 𝐶𝑄
−5 4
5 0.12
𝑃1 = 𝑃 20,000 1 +
P
4
𝑷𝟏 = 𝟏𝟏, 𝟎𝟕𝟑. 𝟓𝟐
 General Mathematics

Problem 12. A man wishes to bequeath to his daughter P 20,000 ten years
from now. What amount should he invest now if it will earn interest of 8%
compounded annually during the first five years and 12% compounded
quarterly during the next five years?
Solution: Note that if the interest rate used is compounded
P 20,000 quarterly, the number of interest period must be in

𝑖 = 8% 𝑒𝑓𝑓 𝑖 = 12% 𝐶𝑄 quarters also. Evaluating 𝑷, which is five years back

from 𝑷𝟏 ,
5

P 𝑃 = 𝑃 11,073.52 1 + 0.08 −5

𝑷 = 𝑷 𝟕, 𝟓𝟑𝟔. 𝟒𝟓
 General Mathematics

Problem 13. A company expects to retire an existing machine at the end of

2020 and will replace it with a new machine for the same task at an estimated
cost of P 60,000. The old machine is expected to be sold for P 5,000 when it is
replaced. To provide for replacement, the company intends to deposit the
following amounts in an account earning interest at 8% compounded
quarterly: P 20,000 at the end of 2017; P 15,000 at the end of 2018; P 10,000
at the end of 2019. What additional amount is needed at the end of 2020 to
purchase the new machine?
 General Mathematics

Solution: Let 𝑭 be the additional amount needed

P 60,000
at the end of 2020 to purchase the new
2017 2018 2019 2020
machine.
P 5,000

P 10,000 F Note that P 5,000 which is the price of

P 15,000
P 20,000 the old machine is expected to be sold,
will be part of cash outflow when they
purchase the machine.
 General Mathematics

First, convert the nominal interest rate to its

Solution: corresponding effective rate.
P 60,000
4
0.08
2017 2018 2019 2020 𝑖 = 1+ − 1 = 8.24%
P 5,000 4
P 10,000 F
P 15,000 At the focal date on 2020,
P 20,000

𝑃 20,000 1.0824 3 + 𝑃 15,000 1.0824 2 + 𝑃 10,000 1.0824 + 𝑃 5,000 + 𝐹 = 𝑃 60,000

𝑭 = 𝑷 𝟏, 𝟐𝟑𝟗. 𝟓𝟖