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Time Value of Money: Ordinary Annuity

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TIME VALUE OF MONEY  Time between the identical cash payments

Ordinary Annuity  Number of periods that the payments will


occur; length of the annuity
An annuity is a series of identical payments
occurring at equal time intervals. When the  Interest rate or target rate used for
payments appear at the end of each time period, discounting the series of payments*
the annuity is said to be an ordinary annuity or
* This rate (represented by i) could be a loan
an annuity in arrears.
interest rate, but it could also be a company's
Example minimum rate of return to be earned on each
investment.
The equal periods of time (represented by n)
between the identical payments of $100 could be a Distinctions: Ordinary Annuity and Annuity Due
year, a 6-month period, a quarter of a year, a
 Each payment of an ordinary
month, etc. In the above example, n = 5 periods of
annuity belongs to the payment
one year each. The interest rate (represented by i)
period preceding its date, while the payment
is used to discount the $100 payments to time
of an annuity-due refers to a payment
period 0. The interest rate might be the company's
period following its date.
required rate, its target rate, its cost of capital, etc.
The $100 amounts are often represented by either  The meaning of the above statement may
the letters "PMT" (for "payment" or receipt) or as not be immediately obvious until we look at
"rent" (since the amount is the same each period). it graphically or compute it.
We are going to focus here on ordinary annuities—  A more simplistic way of expressing the
annuities with equal payments occurring at distinction is to say that payments made
the end of each period (as shown in the above under an ordinary annuity occur at the end
timeline). Annuities due or annuities in advance— of the period while payments made under
annuities with the equal payment amounts an annuity due occur at the beginning of the
occurring at the beginning of each period—will be period.
another topic.) 
n present value calculations, future cash amounts  A third possibility is to define an annuity due
are discounted back to the present time. in terms of an ordinary annuity: an annuity-
due is an ordinary annuity that has its term
Present Value Calculations beginning and ending one period
earlier than an ordinary annuity. This
Present value calculations involve
definition is useful because this is how we
the compounding of interest. This means that
will compute an annuity due.
any interest earned is reinvested and will earn
interest at the same rate as the principal. In other Formula for Present Value of Annuities
words, you earn "interest on interest." The
compounding of interest can be very significant C/1+i+C/1+i+C/1+i+C/1+i
when the interest rate and/or the number of years
are sizable.  This approach works just fine. However , we will
often encounter situations where the number of
The present value of an annuity (i.e., series of cash flows is quite large.
equal payments, receipts, rents) involves five
components: Sample Problem:

 Present value Suppose we were examining an asset that


promised to pay Php500.00 at the end of each of
 Amount of each identical cash payment the next three years. The cash flows from this asset
are in the form of a three-year, Php500.00 ordinary paying eight (8) percent. If you retire in thirty (30)
annuity, If we wanted to earn ten (10) percent on years, how much will you have?
our money, how much we offer for this annuity?

Multiply the present value to the factor


(Mathematical Tables)

P.V. = F.A.(period and interest factor)

P.V.=Php500(2.48685)

P.V.=Php1,243.43

Shortcut Calculations

Here’s how to get the factor (period and interest) of


Present Value of an Annuity using an ordinary
calculator:

 1+i (ex. 1+10% or 0.10) =1.10


Annuities Due
 Press ÷ twice
An Annuity Due is an annuity for which the cash
 Press = (no. of press = no. of periods) flows occurs at the beginning of each period.
Almost any type of arrangement in which we have
Note: first count should start if number shown is to prepay the same amount each period is an
below 1. annuity due.

 To get the P.V. factor, - 1 Annuity due involves two steps:

 Change the sign (+/-)  Calculate the present or future value as


though it were an ordinary annuity.
 Then ÷ the interest
 Multiply your answer by ( 1 + r ).

DISTRIBUTION STRATEGY AND THE


STRATEGIC SELLING CYCLE

Making products available requires a clear


distribution plan composed of the following six (6)
mix elements:

1) Coverage

2) Placement

3) Volume

4) Display
Future Value for Annuities
5) Pricing
Sample Problem:
6) Goodwill
Suppose you plan to contribute
Php2,000.00 every year into a retirement account COVERAGE - Having the proper types of outlet in
a geographical area is important
Example: GOODWILL - Goodwill refers to the best
relationship between a supplier and his channel
San Miguel Beer put up more satellite bottling members. Goodwill enables marketers to have
plants in the areas of Laguna, Cavite, Cagayan de good display space in the stores, increases their
Oro and Ilocos region, not just to expand capacity inventory levels, and in some cases, enables firms
but to lower cost and increase the speed of logistics to have advanced notice about impending
competitive promotional activities or price
PLACEMENT - A product has placement when it is
movements. Goodwill is a result not only of
carried in a store. Placement objectives or having a
monetary gains but also most importantly, of
right target number of outlets ensure consumer’s
consistent “win-win” partnerships between two
utmost convenience
parties within the distribution chain.
Example:

The Philippines is one of the few places where


cigarettes can still be bought on a per piece basis.
The abundance of our unique street vendors
(sometimes called ‘’tak-a-tak’’ boys) enables the
most saleable brands like Hope cigarette and
candies to enjoy a place utility advantage.

VOLUME - The right inventory level at the stores is


critical. A firm may launch a new brand of shampoo
or a promotional campaign, which may result in out-
of-stock situations. Too much inventory or Strategic Selling Cycle
“overloading” the outlets, on the other hand, is Strategy Selling – organization's strategy that
unhealthy as it goes against how a channel combines all of its marketing goals into
member normally earns profit. one comprehensive plan. A good marketing
DISPLAY - The right shelf and off- shelf locations strategy should be drawn from market research and
plus adequate display space assure marketers a focus on the right product
higher probability that consumers will choose their mix in order to achieve the maximum profit
brand over competition. The good spaces in the potential and sustain the business. The marketing
stores, such as those at eye level, are usually given strategy is the foundation of a marketing plan.
to the leading brands. As a consequence, new
brands have to assure an equal chance of being
seen in the marketplace.

PRICING - Having the right resale prices promotes


healthy competition among dealers. Price wars are
usually avoided, as dealers do not gain anything in
the end. Some dealers might also end up not
wanting to sell the firm’s products due to financial
non-gain.

Example:

Pure foods would meet with their wet market


vendors in a price war situation to discourage them
from proceeding with their price in case supply be
pending if they continue to do so.
Selling To End Users

The producer sells the goods or provides the


service directly to the consumer with no
involvement with a middle man such as
an intermediary, a wholesaler, a retailer, an agent,
or a reseller.

1. Prospecting - Identify who is your target


customer
2. Pre-approach - Is when you gather relevant
information regarding the prospect in order
to create customized sales presentation
3. Approach - This step is where you begin to
1. Routine Observation – to ensure their
build relationship between your buyer.
success
4. Sales Probing - To understand and satisfy
2. Display Check - Visit the selling area of the
customer’s needs and wants.
retailer to check on his product’s placement
5. Presentation - To identify the customers
and display
requirements, a better trust is created
3. Warehouse Check - Done to determine the
between the seller and the buyer
inventory level of the firm’s products before
6. Handling Objections - When a sales person collection of accounts is done.
demonstrates a feature, talks about a
benefit or uses a sales closing technique, Electronic data interchange (EDI) is an electronic
their customer may well respond in the communication system that provides standards for
negative sense, giving excuses or otherwise exchanging data via any electronic means.
heading away from the sale.
7. Demonstration - Is a presentation with the 4. Handling Objections - When a sales person
use of an actual product (while a demonstrates a feature, talks about a
presentation may only be using sales aids benefit or uses a sales closing technique,
like brochures their customer may well respond in the
8. Closing - Is the final step of a transaction. In negative sense, giving excuses or otherwise
sales, it is used more generally to mean heading away from the sale.
achievement of the desired outcome. 5. Sell-out Plan -
contract for the sale of securities or commo
dities one expects to own at a later date and 
at more advantageous terms
6. Closing - is the final step of a transaction. In
sales, it is used more generally to mean
achievement of the desired outcome.

DISTRIBUTION CHANNELS

A distribution channel performs the work of moving


products from manufacturers to final consumers or
business users. A good distribution channel
shortens the time, place, and possession gaps
between the manufacturers and consumers.
 INDIRECT MARKETING

> In indirect channels of distribution there are one


or more middlemen between the manufacturer and
consumers. There is no direct contact between the
producers and the customers.

Distributors - are appointed to perform the


distribution function for manufacturers in making
their products available. They may cover an entire
country on an exclusive distributor basis or may be
appointed to do the distribution function within a
defined territory or defined store type.

Wholesaling - are activities of persons or


organizations that sell to those who buy for resale
(like retailers) or business use (like industrial,
institutional, and commercial users). Wholesaling
lessen the interaction between
manufacturers/principals and retailers.

Jobbers

• Jobbers are wholesalers who also provide


warehousing space for manufacturers and
distributors, thus enabling the letter to avoid
a fixed cost.

• Jobbers are usually appointed in areas


where a firm does not have economies of
sales. Jobbers enjoy a discount depending
on the amount they purchase.

EX-Truck - is a sales operation where the ex-truck


salesman carries stock in his van or small truck,
saturates a given territory regularly by selling his
stocks on ‘’cash” basis, and delivers the stock
immediately upon order.

Feeder - Some manufacturers or wholesalers/


distributors are using the feeder model.

Retailing - is an activity involving the sale of


products or services directly to final consumers.

Franchising
 DIRECT MARKETING  an accelerated method to expand
> Direct marketing is about making direct contact distribution coverage is thru franchising.
with existing and potential customers to promote  In franchising, a franchise fee is paid to the
your products or services. franchise owner in exchange of an
establishment brand name, a proven
system of operation, training and other well as send these orders to the branch
infrastructure support. nearest customer.

Direct Selling • Organizing or appointing a delivery crew to


ensure the food order will be received by
  is the marketing and selling of products the customer promptly and within the time
directly to consumers away from a fixed expected.
retail location. Modern direct selling includes
sales made through the one-on-one Gray Market
demonstrations and other personal contact
arrangements as well as internet sales.  Term used to describe unauthorized
importation and distribution of products
 There are over two-dozen members of the bearing genuine brands across markets.
Direct Selling Association of the Philippines
(DSAP). Some members are:  A market where a product is bought and
sold outside of the manufacturer's
 Amway (personal and home authorized trading channels. 
care)
 The unofficial trading of a company's
 Avon (cosmetic and related
shares, usually before they are issued in an
products)
initial public offering (IPO). 
 Nu Skin ( beauty and health
care)  For example, if a store owner is an
 Sunrider (food supplements) unauthorized dealer of a certain high-end
 Tupperware (plastic wares) electronics brand, the product is considered
 Waters (water purifiers and to be sold in the grey market. If the product
foot detox) is illegal, it would be selling on the "black
market".
Internet
 The grey market is an over-the-counter
E-business has been the buzzword since the market where dealers may execute orders
1990s. No longer are companies limited to sell for preferred customers as well as provide
products through stores or through direct sales. support for a new issue before it is actually
Business-to-business (B2B) marketing is also issued. This activity allows underwriters and
giving a different face to the selling process as the issuer to determine demand and price
companies realize that substantial money and time the securities accordingly before the IPO. 
can be save from the paperless e-marketplace
popularized by Oracle software.

BPI, BDO and other banks offer banking via the


internet giving utmost 24x7 (24 hours, 7 days a
week) convenience to the depositors

BayanTrade.com is the Philippines’ first internet-


based procurement exchange.

Home Delivery

 The process of home delivery involves:

• Appointing a centralized call center operator


who is tasked to take or suggest orders as

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