11

General
Mathematics
Quarter 2 – Module 4:
Cash Flow and Deferred Annuity
General Mathematics – Grade 11
Self-Learning Module (SLM)
Quarter 2 – Module 4: Cash Flow and Deferred Annuity
First Edition, 2020

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 11

General
Mathematics
Quarter II – Module 2:
Cash Flow and Deferred Annuity
Introductory Message
For the facilitator:

Welcome to the Grade 11 General Mathematics Self-Learning Module (SLM) on Cash

Flow and Deferred Annuities.

This module was collaboratively designed, developed and reviewed by educators both
from public and private institutions to assist you, the teacher or facilitator in helping
the learners meet the standards set by the K to 12 Curriculum while overcoming
their personal, social, and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration their
needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of
the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to manage
their own learning. Furthermore, you are expected to encourage and assist the
learners as they do the tasks included in the module.

2
For the learner:

Welcome to the Grade 11 General Mathematics Self-Learning Module (SLM) on Cash

Flow and Deferred Annuities.

The hand is one of the most symbolized part of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a learner
is capable and empowered to successfully achieve the relevant competencies and
skills at your own pace and time. Your academic success lies in your own hands!

This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at your own pace and time. You will be enabled to
process the contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in the
module.

What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.

What’s In This is a brief drill or review to help you link

the current lesson with the previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of the

lesson. This aims to help you discover and
understand new concepts and skills.

What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.

What I Have Learned This includes questions or blank

sentence/paragraph to be filled in to process
what you learned from the lesson.

What I Can Do This section provides an activity which will

help you transfer your new knowledge or skill
into real life situations or concerns.

3
 Assessment This is a task which aims to evaluate your
level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

to you to enrich your knowledge or skill of the
lesson learned. This also tends retention of
learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in developing

this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the
module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.

We hope that through this material, you will experience meaningful learning and
gain deep understanding of the relevant competencies. You can do it!

4
 What I Need to Know

This module was designed and written with you in mind. It is here to help you master
the simple and general annuities. The scope of this module permits it to be used in
many different learning situations. The language used recognizes the diverse
vocabulary level of students. The lessons are arranged to follow the standard
sequence of the course. But the order in which you read them can be changed to
correspond with the textbook you are now using.

The module is composed of one lesson but outline in the following manner:

1. Fair Market Value of a Cash Flow

2. Deferred Annuity

After going through this module, you are expected to:

 calculate the fair market value of a cash flow stream that includes an annuity;
 calculate the present value of a deferred annuity.

5
 What I Know

Find how much you already know about the topic in this module. Take note of the
items that you were not able to answer correctly and find the right answer as you go
through this module.

Choose the letter of the best answer. Write the chosen letter on a separate sheet of
paper.

1) A term that refers to the payments received, or payments or deposit made.

A. Cash flow
B. Fair market value
C. Cash Price
D. Single amount

2) An annuity that does not begin until a given time interval has passed.
A. Annuity
B. Deferred annuity
C. Immediate annuity
D. Period of deferral

3) Refers to a single amount that is equivalent to the value of the payment stream
at a particular date.
A. Cash flow
B. Fair market value
C. Cash Price
D. Focal Date

For items 4 – 12, refer to the cash flow problem below.

Mr. Limpiado received two offers on a lot that he wants to sell.
First Offer: Php 20,000 down payment and a Php 800,000 lump sum payment 6
years from now.
Second Offer: Php 25,000 down payment plus Php 30,000 every quarter for 6 years.
Both money earns at 6.5% compounded annually.

4) What is the present value of the 1st offer if the focal date is at the start of the
term?
A. Php 584, 627.30
B. Php 576, 248.30
C. Php 562, 478.30
D. Php 548, 267.30

6
5) What is the fair market value of the 1st offer if the focal date is at the start of the
term?
A. Php 604, 627.30
B. Php 596, 248.30
C. Php 568, 267.30
D. Php 542, 478.30

6) What is the present value of the 2nd offer if the focal date is at the start of the
term?
A. Php 594, 897.79
B. Php 585, 945.79
C. Php 558, 499.79
D. Php 549, 598.79

7) What is the fair market value of the 2nd offer if the focal date is at the start of
the term?
A. Php 619, 897.79
B. Php 610, 945.79
C. Php 583, 499.79
D. Php 574, 598.79

8) What is the future value of the 1st offer if the focal date is at the end of the term?
A. Php 91, 228.85
B. Php 82, 219.85
C. Php 29, 182.85
D. Php 21, 289.85

9) What is the fair market value of the 1st offer if the focal date is at the end of the
term?
A. Php 891, 228.85
B. Php 882, 219.85
C. Php 829, 182.85
D. Php 841, 289.85

10) What is the future value of the 2nd offer if the focal date is at the end of the term?
A. Php 886, 307.69
B. Php 873, 086.69
C. Php 868, 034.69
D. Php 838, 670.69

11) What is the fair market value of the 2nd offer if the focal date is at the end of the
term?
A. Php 911, 307.67
B. Php 904, 513.24
C. Php 898, 086.67
D. Php 893, 034.69

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12) Which offer should Mr. Limpiado choose?
A. 1st offer
B. 2nd offer
C. Any of the offers since they have equal market value
D. None of the two offers

For items 13 – 15, refer to the situation below:

Emma availed of a cash loan that gave her an option to pay Php 10,000 monthly
for 1 year. The first payment is due after 6 months.

13) What is the period of deferral?

A. 6
B. 5
C. 4
D. 2

14) What is the present value of the annuity if the interest rate is 12% converted
monthly and if there are no skipped payments.
A. Php 155, 622.51
B. Php 152, 265.51
C. Php 151, 562.51
D. Php 150, 221.51

15) What is the present value of the deferred annuity if the interest rate is 12%
converted monthly?
A. Php 120, 877.20
B. Php 108, 087.20
C. Php 107, 088.20
D. Php 102, 878.20

8
 Lesson
Cash Flow and Deferred
1 Annuity
This lesson will help you understand the application of annuity in any
situation that involves cash flow of any business entity or individual engages in
loans, mortgages, investments, and the like.

What’s In

Before we apply the concepts of present and future values of annuities to solve
problems about cash flow, refresh first your understanding about the previous
lessons by doing the following activities.

Activity 1
Determine if the situation exemplifies simple or general annuity.

1) James pays a monthly installment of an appliance with interest rate compounded

monthly.
2) Jayson pays a monthly installment of an appliance with interest rate
compounded annually.
3) Nathaniel saves Php 3,000 every month in a fund that gives 9% compounded
monthly.
4) Merven paid Php 200,000 as down payment for a car. The remaining amount is
to be settled by paying Php 16,200 at the end of every 3 month for 5 years with
an interest rate of 10.5% compounded quarterly.
5) To pay for his debt at 12% compounded semi-annually, Ruben committed 8
quarterly payments of Php 24, 491.28.

Activity 2
Eleasar started to deposit Php 1,000 monthly
in a fund that pays 6% compounded
semi-annually. After 15 years, he will have
Php 290,076.28 in his fund.

Using the annuity problem, give the value Notes to the Teacher
of each variable in the formula Converting interest rates to the

FR
1  j n  1 : equivalent rates
Identifying regular payment
j Number of payments
Illustrating cash flow through time
1) R 3) n diagram
2) F 4) j

9
 What’s New

Activity 3
Mr. Ribaya received two offers on a lot that he wants to sell. Mr. Ocampo has
offered Php 50,000 and a P1 million lump sum payment 5 years from now. Mr. Cruz
has offered Php 50,000 plus Php 40,000 every quarter for five years.

Mr. Ocampo’s offer Mr. Cruz’s offer

Php 50,000 down payment Php 50,000 down payment

Php 1,000,000 after 5 years Php 40,000 every quarter for 5 years

If money can earn 5% compounded annually, which offer should Mr. Ribaya
choose? Why?

What is It

Fair Market Value of a Cash Flow

A cash flow is a term that refers to payments received (cash inflows) or
payments or deposits made (cash outflows). Cash inflows can be represented by
positive numbers and cash outflows can be represented by negative numbers.
The cash flow report is important because it informs the reader of the business
cash position. For a business to be successful, it must always have sufficient cash.
It needs cash to pay its expenses, to pay bank loans, to pay taxes and to purchase
new assets.

A cash flow report determines whether a business has enough cash to do

exactly this. Having cash is a key requirement for a business to stay solvent. When
a business has no longer enough cash to pay its dues, it is often declared bankrupt.

The fair market value or economic value of a cash flow (payment stream)
on a date refers to a single amount that is equivalent to the value of the payment
stream at that date. This date is called the focal date.

The concepts about present and future values of ordinary annuity is

necessary to determine the fair market value of a cash flow.

10
Remember the following formulas:

Future Value of Present Value of

where:
Ordinary Annuity Ordinary Annuity

FR
1  j n  1 PR
1  1  j 
n R = is the regular payment
j = is the equivalent rate per payment.
j j n = is the number of payments

Consider the situation of Mr. Ribaya stated previously in Activity 3. Let’s apply the
concepts of present and future values to solve this cash flow problem.

Cash Flow Problem:

MR. Ocampo’s Offer Mr. Cruz’s Offer

Php 50 000 down payment Php 50 000 down payment
Php 1 000 000 after 5 years Php 40 000 every quarter for 5 years

Compare the fair market values of the two offers if money can earn 5% compounded
annually. Which offer has a higher market value?

Solution:
Find: Fair Market of each offers

1. Illustrate the cash flow of the two offers using time diagram

Mr. Ocampo’s Offer

50 000 1 million
0 1 2 3 … 20

Mr. Cruz’s offer

50 000 40 000 40 000 40 000 … 40 000

0 1 2 3 … 20

2. Choose a focal date and determine the values of the two offers at that focal date.

Hint: It is usually convenient to choose focal dates to either be at the start or at the
end of the term.

SOLUTION 1
Choose the focal date to be the start of the term. Since the focal date is at t = 0,
compute for the present value of each offer.

Mr. Ocampo's offer: Since Php 50,000 is offered today, then its present value is still
Php 50,000. The present value of Php 1,000,000 offered five years from now is:

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 P = F (1 + j)−𝑛
= 1 000 000(1 + o. 05)−5 = Php 783 526.17
Fair Market Value (FMV) = down payment + Present value
Fair Market Value (FMV) = Php 50 000 + Php 783 526.17 = Php 833 526.17

Mr. Cruz’s offer:

Compute for the present value of a general annuity with quarterly payments
but with annual compounding at 5%.

i 4 
Solve the equivalent rate, j  , of 5% compounded annually.
4

Equate formulas for future value. F1  F2

4 t  1t 
 i 4    i (1) 
Substitute. P1    P1  
 4   1 

 i 4  
4t t
1  0.05 
Divide both sides by P and substitute i  0.05 . 1    1  
 4   1 
i 4 
 1.054
1 1
Raise both sides by . 1
4t 4
i 4  i 4  4
Solve for .  1.05  1  0.012272
4 4

i 4 
The present value of an annuity with n  mt  4(5)  20 and j   0.012272 is given
4
by

1  1  j  1  1  0.012272
n 20
PR  40,000  Php 705,572.68
j 0.012272
Fair Market Value = Down Payment + Present Value
= Php 50 000 + Php 705 572.68
= Php 755 572.68

Hence, Mr. Ocampo’s offer has a higher market value. The difference between
the market values of the two offers at start of the terms is

Php 833 526.20 – Php 755 572. 72 = Php 77 953.50 .

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SOLUTION 2 Choose the focal date to be the end of the term.

Mr. Ocampo's offer:

At the end of the term, Php 1,000,000 is valued as such (because this is the
value at t = 5). The future value of Php 50,000 at the end of the term at 5%
compounded annually is given by F  P1  j   50,0001  0.05  Php 63,814.08 .
n 5

Fair Market Value = Php 63,814.08 + Php 1,000,000

= Php 1,063 814.08

Mr. Cruz's offer:

The future value of this ordinary general annuity is given by:

FR
1  j  1
n
 40,000
1  0.012272  1
20
 Php 900,509.40
j 0.012272

The future of P50 000 at the end of the term is

F  P1  j   50,0001  0.05  Php 63,814.08
n 5

Fair Market Value = Php 63 814.08 + Php 900 509.40

= Php 964 323.48

As expected, Mr. Ocampo’s offer still has a higher market value, even if the focal
date was chosen to be at the end of the term. The difference between the market
values of the two offers at the end of the term is:
1 063 814.08 − 964 323.48 = Php 99 490.60

You can also check that the present value of the difference is the same as the
difference computed when the focal date was the start of the term:
P  99,490.601  0.05  Php 77,953.49
5

Deferred Annuity
There are annuities that the series of payments will start on a later date. This
type of annuity refers to deferred annuity. A deferred annuity is an annuity that
does not begin until a given time interval has passed. The time between the purchase
of an annuity and the start of the payments for the deferred annuity is referred to as
period of deferral.

The following are examples of deferred annuity in real life:

 A credit card company offering its clients to purchase today but to start
paying monthly with their choice of term after 3 months.

 A real estate agent is urging a condominium unit buyer to purchase now and
start paying after 3 years when the condominium is ready for occupancy.

13
  A worker who has gained extra income now and wants to save his money so
that he can withdraw his money starting on the day of his retirement from
work.

Consider the two payment schemes below:

Scheme 1 Scheme 2
Suppose Mr. Gran wants to purchase a What if Mr. Gray is considering another
cellular phone. He decided to pay cellular phone that has a different
monthly for 1 year starting at the end of payment scheme? In this scheme, he has
the month. How much is the cost of the to pay Php. 2,500 for 1 year starting at
cellular phone if his monthly payment is the end of the fourth month. If the interest
Php 2,500 and interest is at 9% rate is also 9% converted monthly, how
compounded monthly? much is the cash value of the cellular
phone?

Note that the two payment schemes have the same number of payments n and
the same interest rate per period j. Their main difference is the start of the payments.
The first scheme started at the end of the first interval which makes it an ordinary
annuity. The cost of the cellular phone is here is
1  1  j  1  1  0.0075
n 12
PR  2,500  Php 28,587.28
j 0.0075

The second scheme started on a later date. This annuity is called deferred
annuity.

In scheme 2, Mr. Gray pays starting at th end of the fourth month to the
end of the 15th month. The time diagram for this option is given by:

Here are the steps to solve this type of annuity problem:

Step 1: Assume first that payments are are also being made during the period of
deferral; in other words, there are no skipped payments. The associated time diagram
is

Its present value P of this ordinary annuity is computed as

1  1  j  1  1  0.0075
n 15
P  R  2,500  Php 35,342.49
j 0.0075

Step 2: Compute the present value P * of the 3 payments made during the period of
deferral.

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 1  1  j  1  1  0.0075
n 3
P*  R  2,500  Php 7,388.89
j 0.0075

Step 3: Subtract the present value of these artificial payments in the period of
deferral.
P  P*  Php 34,342.49  Php 7,388.89  Php 27,953.60

Comparing the values of the two schemes, the present value in Scheme 2 is
lower than the present value of Scheme 1 because the payment in Scheme 2 will be
received on a later date.

Generally, to determine the present value of a deferred annuity, find the

present value of all k  n payments (including the artificial payments), then subtract
the present value of all artificial payments.

15
Example. Mr. Quijano decided to sell their farm and to deposit the fund in a bank.
After computing the interest, they learned that they may withdraw P480,000 yearly
for 8 years starting at the end of 6 years when it is time for him to retire. How much
is the fund deposited if the interest rate is 5% converted annually?

Given: R = 480,000 m=1 j = 0.05 k =5 n=8

Find P
Solution. The present value of the deferred annuity can be solved as

1 − (1 + j)−(k+n) 1 − (1 + j)−k
P=R −R
j j

1 − (1 + 0.05)−13 1 − (0.05)−5
𝑃 = 480,000 − 480,000 = 2,430,766.23
0.02 0.02

Therefore, the present value of these withdrawals is Php 2,430,766.23

What’s More

Activity 4
Solve the following problems.
1) CASH FLOW Company A offers P150,000 at the end of 3 years plus P300,000
at the end of 5 years. Company B offers P25,000 at the end of each quarter for
the next 5 years. Assume that money is worth 8% compounded annually.
Which offer has a better market value?

Company A Company B
P150 000 at the end of 3 years P25 000 at the end of each quarter for
P300 000 at the end of 5 years the next 5 years

2) DEFERRED ANNUITY A credit card company offers a deferred payment option

for the purchase of any appliance. Rose plans to buy a smart television set with
monthly payments of Php 4,000 for 2 years. The payment will start at the end of
3 months. How much is the cash price of the TV set if the interest rate is 10%
compunded monthly?

16
 What I Have Learned

Activity 5
Supply the blank with the correct term.

1. A is a term that refers to payments received (cash inflows)

or payments or deposits made (cash outflows).

2. Cash inflows can be represented by numbers and cash

outflows can be represented by numbers.

3. The of a cash flow (payment stream) on a date refers to a

single amount that is equivalent to the value of the payment stream at that
date. This date is called the .

4. A is an annuity that does not begin until a given time

interval has passed. The time between the purchase of an annuity and the
start of the payments for the deferred annuity is referred to as .

5. The present value of deferred annuity can be calculated using the formula
.

What I Can Do

1) A television set is for sale at Php 13,499 in cash or on installment terms, Php
2,500 each month for the next 6 months at 9% compunded annually. If you were
the buyer, what would you prefer, cash of installment?

2) A loan of Php 30,000 is to be repaid monthly for 5 years that will start at the end
of 4 years. If interest rate is 12% converted monthly.
a) The type of annuity illustrated in the problem is a ________.
b) The total number of payments is _________.
c) The number of conversion periods in the period of deferral is ___________.
d) The interest rate per period is ___________.
e) The present value of the loan is ___________.
f) The monthly payment (or regular payment R) is ___________.

17
 Assessment

Multiple Choice. Choose the letter of the best answer. Write the chosen letter on a
separate sheet of paper.
1) A term that refers to the payments received, or payments or deposit made.
A. Cash flow
B. Fair market value
C. Cash Price
D. Single amount

2) An annuity that does not begin until a given time interval has passed.
A. Annuity
B. Deferred annuity
C. Immediate annuity
D. Period of deferral

3) Refers to a single amount that is equivalent to the value of the payment stream
at a particular date.
A. Cash flow
B. Fair market value
C. Cash Price
D. Focal Date

For items 4 – 12, refer to the cash flow problem below.

Mr. Limpiado received two offers on a lot that he wants to sell.

First Offer: Php 20,000 down payment and a Php 800,000 lump sum
payment 6 years from now.
Second Offer: Php 25,000 down payment plus Php 30,000 every quarter for 6 years.
Both money earns at 6.5% compounded annually
.
4) What is the present value of the 1st offer if the focal date is at the start of the
term?
A. Php 584, 627.30
B. Php 576, 248.30
C. Php 562, 478.30
D. Php 548, 267.30

5) What is the fair market value of the 1st offer if the focal date is at the start of the
term?
A. Php 604, 627.30
B. Php 596, 248.30
C. Php 568, 267.30
D. Php 542, 478.30

18
6) What is the present value of the 2nd offer if the focal date is at the start of the
term?
A. Php 594, 897.79
B. Php 585, 945.79
C. Php 558, 499.79
D. Php 549, 598.79

7) What is the fair market value of the 2nd offer if the focal date is at the start of
the term?
A. Php 619, 897.79
B. Php 610, 945.79
C. Php 583, 499.79
D. Php 574, 598.79

8) What is the future value of the 1st offer if the focal date is at the end of the term?
A. Php 91, 228.85
B. Php 82, 219.85
C. Php 29, 182.85
D. Php 21, 289.85

9) What is the fair market value of the 1st offer if the focal date is at the end of the
term?
A. Php 891, 228.85
B. Php 882, 219.85
C. Php 829, 182.85
D. Php 841, 289.85

10) What is the future value of the 2nd offer if the focal date is at the end of the term?
A. Php 886, 307.69
B. Php 873, 086.69
C. Php 868, 034.69
D. Php 838, 670.69

11) What is the fair market value of the 2nd offer if the focal date is at the end of the
term?
A. Php 911, 307.67
B. Php 904, 513.24
C. Php 898, 086.67
D. Php 893, 034.69

12) Which offer should Mr. Limpiado choose?

A. 1st offer
B. 2nd offer
C. Any of the offers since they have equal market value
D. None of the two offers
For items 13 – 15, refer to the situation below:

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 Emman availed of a cash loan that gave her an option to pay Php 10,000
monthly for 1 year. The first payment is due after 6 months.

13) What is the period of deferral?

A. 6
B. 5
C. 4
D. 2

14) What is the present value of the annuity if the interest rate is 12% converted
monthly and if there are no skipped payments.
A. Php 155, 622.51
B. Php 152, 265.51
C. Php 151, 562.51
D. Php 150, 221.51

15) What is the present value of the deferred annuity if the interest rate is 12%
converted monthly?
A. Php 120, 877.20
B. Php 108, 087.20
C. Php 107, 088.20
D. Php 102, 878.20

Additional Activities

Activity 7
1) Make a research on some strategies used by homeowner to reduce the total
payment on loans.
2) Go to an appliance store, and ask how much a certain appliance costs if it is (a)
paid in full, or (b) paid by installment.
3) If you know someone borrowing from a moneylender, ask how much you will be
charged if you want to borrow P1,000, payable in 1 year. [One common non-
formal lending practice in the Philippines is called five-six.]

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 21
What I Know What's More What I Can Do
16.A A.4 A.6
17.B 1. Company B’s offer is 1. Present value of
18.B preferable since its installment is Php
19.D market value 14,628.79 (use
20.C (Php409,560.47) is j=0.007207; n=6); So,
21.A larger than Company A better to pay Php
22.A (Php321,216.43 13,499 if cash is
23.C available, or wait
24.C 2. Php 85,260.53 until you can save
25.C enough cash than to
26.B pay by installment
27.B What I Have Learned
28.B 2. Cash flow
29.A A.5 a) Deferred
30.A 3. Cash flow b)60
4. Postive; negative c) 47
5. Fair market value or d)1% or 0.01
What’s In economic vlaue; e) Php 30,000
focal date f) Php 1,065.24
A.1 6. Deferred annuity
1. Simple 7. Assessment
2. General A.7
3. Simple 1. A
4. Simple 2. B
5. General 3. B
4. D
A.2 5. C
1. Php 1,000 6. A
2. Php 290, 076.28 7. A
3. 30 8. C
4. 3% 9. C
10.C
11.B
What’s New
12.B
Mr. Ocampo’s offer, 13.B
because it has higher 14.A
fair market value. 15.A
Answer Key
References

BLR, DepEd -. 2016. GENERAL MATHEMATICS Teacher's Guide. Pasig City:

Department of Education.

BLR, DepED. 2016. GENERAL MATHEMATICS Learner's Materials. Pasig City:

Department of Education

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