CHAPTER 9:

TIME VALUE OF
MONEY III:
UNEQUAL MULTIPLE
PAYMENT VALUES
LET’S PLAY A GAME!
 EXAMPLE:
IN VASE MINT
ANSWER: INVESTMENT
 MECHANICS
STEP 1: STEP 2: STEP 3:
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WHICH ANSWER YOU MAY GETS THE CORRECT
WHERE TAKEN FROM CLICK THE RAISE HAND ANSWER GETS 2 POINTS,
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POINTS
ARE YOU READY?
PIE MINT
 PAYMENT
From The Economic Time definition.
Payment is the exchange of money,
goods, or services for goods and
services in an acceptable amount
to both parties and has been
agreed upon in advance.
BALE LOSE
 VALUES
According to Kenton(2022) Value is
the monetary, material, or assessed
worth of an asset, good, or
service. "Value" is attached to a
myriad of concepts including
shareholder value, the value of a
firm, fair value, and market value.
AUNT WET TEA
 ANNUITY
According to Mayres(2022)
An annuity is a series of equal cash
flows, equally distributed over time.
DISK COIN THING
 DISCOUNTING
According to Prest(2022)
Discounting is the process of
converting a value received in a
future time period to an equivalent
value received immediately.
CAMP FOUND DEAN
 COMPOUNDING
According to Chen(2022)
Compounding is the process
whereby interest is credited to an
existing principal amount as well
as to interest already paid.
Compounding thus can be construed
as interest on interest—the effect of
which is to magnify returns to
interest over time, the so-called
“miracle of compounding.”
THANK YOU FOR YOUR
PARTICIPATION!
 CHAPTER 9:

TIME VALUE OF
MONEY III:
UNEQUAL MULTIPLE
PAYMENT VALUES
 IMPORTANCE OF STUDYING THIS TOPIC:
§ Because it allows investors to make a more informed decision
about what to do with their money. The TVM can help you
understand which option may be best based on interest,
inflation, risk and return.

§ It helps investors and people saving for retirement determine

how to get the most out of their money. This concept is
fundamental to financial literacy and applies to your savings,
investments and purchasing power.

§ Having money right now is more valuable than getting the same
amount in the future. From a business perspective, the money
can be used for the expansion of the business, which can
generate more money.

§ The future is always uncertain. Therefore, better financial

decisions can be taken with the time value of money.
 CONCEPT OF THIS TOPIC

Money has time value. In simpler terms, the value of a

certain amount of money today is more valuable
than its value tomorrow. It is not because of the
uncertainty involved with time but purely on account of
timing. The difference in the value of money today and
tomorrow is referred to as the time value of money.
 CONCEPT OF THIS TOPIC
Money has time value because of the following reasons:

Future is always uncertain and risky. Outflow of cash is

in our control as payments to parties are made by us.
There is no certainty for future cash inflows. Cash
inflows are dependent on our Creditor, Bank etc. As an
individual or firm is not certain about future cash receipts,
it prefers receiving cash now.
 CONCEPT OF THIS TOPIC
Money has time value because of the following reasons:

In an inflationary economy, the money received today,

has more purchasing power than the money to be
received in future. In other words, a rupee today
represents a greater real purchasing power than a rupee
a year after.
 CONCEPT OF THIS TOPIC
Money has time value because of the following reasons:

Individuals generally prefer current consumption to

future consumption.
 CONCEPT OF THIS TOPIC
Money has time value because of the following reasons:

An investor can profitably employ a rupee received today, to give

him a higher value to be received tomorrow or after a
certain period of time. Thus, the fundamental principle behind
the concept of time value of money is that, a sum of money
received today, is worth more than if the same is received after a
certain period of time.
WHAT IS TIME VALUE OF MONEY?
Time Value of Money (TVM) is an important concept that
validates that money’s worth is higher now than in the
future. Idle cash held is worth less today than yesterday or last
month.

Holding money today can be put to use. For instance, it can be

used for business expansion, investments, or other expenses. On
the other hand, the money you ought to get in the future is only
on paper. Hence doesn’t add any value in the present.
 WHAT IS FUTURE VALUE?

Future value is the value of an investment at the end

of the investment duration. You can determine the
future value for lump sum investments as well as
recurring investments such as SIPs or Systematic
Investment Plan.
 WHAT IS PRESENT VALUE?

Present value is the value of the money you hold

today. Also, it is the present value of the sum of all
future cash flows from an investment. The future cash
flows are discounted at a discount rate. A lower discount
rate implies a higher present value of the future cash
flows and vice versa.
 DEFINITION OF TERMS

An annuity is a series of equal cash flows, equally

distributed over time.
 DEFINITION OF TERMS

Difference between annuity due and ordinary annuity

1. Annuity Due - An annuity due is an annuity
in which the cash flows, or payments, occur at
the beginning of the period.
2. Ordinary Annuity - An ordinary annuity is an
annuity in which the cash flows, or payments,
occur at the end of the period.
 DEFINITION OF TERMS

Two stages to annuity contract

1. Accumulation stage- the period in a
person's life in which they are saving for
retirement.
2. Distribution stage- when you're ready to
begin spending the money to create an income
in retirement.
 DEFINITION OF TERMS

4 types of annuity:
1. Immediate annuity – designed to provide an immediate guaranteed
lifetime payout.
2. Deferred annuity - provide guaranteed income in the form of a lump
sum or monthly income payments on a date in the future.
3. Fixed annuity- can guarantee you an ongoing income stream for a
period of time. Payments can start during retirement and continue for the
rest of your life.
4. Variable annuity - a type of annuity contract, the value of which can vary
based on the performance of an underlying portfolio of sub accounts.
 DEFINITION OF TERMS

A series of cash flows exhibiting any pattern other than

that of an annuity. A stream of cash flows of different
amounts.
 DEFINITION OF TERMS

It is a term that can be used for projects or a company.

Cumulative cash flow is calculated by adding all of the
cash flows from the inception of a company or project.
 DEFINITION OF TERMS

A lump sum is an amount of money that is paid as a

large amount on a single occasion rather than as
smaller amounts on several separate occasions.
 DEFINITION OF TERMS

A payment stream is when you don’t pay for something in

one payment but rather pay in smaller amounts
continuously.
 DEFINITION OF TERMS

Discounting is the process of converting a value

received in a future time period to an equivalent value
received immediately.
 DEFINITION OF TERMS

Compounding is the process whereby interest is

credited to an existing principal amount as well as to
interest already paid. Compounding thus can be construed
as interest on interest—the effect of which is to magnify
returns to interest over time, the so-called “miracle of
compounding.”
FV�= PV x (1 + i)n
1+� �−1 Where,
FV� = PYMNT x �
� 1+�
FV = Future Value
1 PV = Present Value
1− i = Interest Rate
1+� �
��� = ���� � n = No. of periods
�
PYMT = Payment
1
PV�= FV x 1+� �
USE OF SCI-CAL

for raise to n

for fraction

for open & close

parentheses
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning
immediately. Since you have extra money, you invest additional
amounts of P 15,000 at beginning of years 3 and 4. It is expected
to earn 8% each year. What is the anticipated future value of this
investment after the full four years?
NOTE: Remember that all money to be deposited in your investment at the beginning of
each year. The cumulative cash flows do not yet consider interest.

Year 0 1 2 3 4

Cash Invested P 0.00 P 25,000 P 25,000 P 40,000 P 40,000

Cumulative Cash Flows P 25,000 P 50,000 P 90,000 P 130,000

Years to Compound 4 3 2 1
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately.
Since you have extra money, you invest additional amounts of P 15,000 at
beginning of years 3 and 4. It is expected to earn 8% each year. What is the
anticipated future value of this investment after the full four years?

FORMULA
FV� = PV x (1 + i)n
QUESTION:
Ø What are the PV or Present Value? Compounding
It is the process in which
ü P 25,000 and P 40,000 an asset’s earnings,
Ø What is the i or Interest Rate? from either capital gains or
ü 8% or 0.08 interest, are reinvested
to generate additional
Ø What is the n or number of years to compound? earnings over time.
ü 4 years
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning
immediately. Since you have extra money, you invest additional
amounts of P 15,000 at beginning of years 3 and 4. It is expected to
earn 8% each year. What is the anticipated future value of this
investment after the full four years?
SOLUTION:
FORMULA IF MANUAL COMPUTATION:
FV� = PV x (1 + i)n
FV1 = 25,000 x (1 + 0.08)4
FV1 = 25,000 x (1.08)4
FV1 = 25,000 x (1.08 x 1.08 x 1.08 x 1.08)
FV1 = 25,000 x 1.36048896
FV1 = P 34,012.22
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately.
Since you have extra money, you invest additional amounts of P 15,000
at beginning of years 3 and 4. It is expected to earn 8% each year. What
is the anticipated future value of this investment after the full four years?
FORMULA SOLUTION:
FV� = PV x (1 + i)n FV1 = 25,000 x (1 + 0.08)4
= P 34,012.22
FV2 = 25,000 x (1 + 0.08)3
= P 31,492.80
FV3 = 40,000 x (1 + 0.08)2
= P 46,656.00
FV4 = 40,000 x (1 + 0.08)1
= P 43,200.00
FV = P 155,361.02
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately.
Since you have extra money, you invest additional amounts of P 15,000
at beginning of years 3 and 4. It is expected to earn 8% each year. What
is the anticipated future value of this investment after the full four years?

Year 0 1 2 3 4

Cash Invested P 0.00 P 25,000 P 25,000 P 40,000 P 40,000

Cumulative Cash Flows P 25,000 P 50,000 P 90,000 P 130,000

Years to Compound 4 3 2 1

Compounded Value at
P 34,012.22 P 31,492.80 P 46,656.00 P 43,200.00
End of Year 4
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately.
Since you have extra money, you invest additional amounts of P 15,000 at
beginning of years 3 and 4. It is expected to earn 8% each year. What is the
anticipated future value of this investment after the full four years?

Another way to look at the problem is as a four-year annuity

of P 25,000 per year plus added payments in years 3 and 4.
Can we solve for the future value of an annuity first and then
perform two separate calculations on the additional
amounts (P 15,000 each in years 3 and 4)?
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
This must give us the same result. The formula for the future value of
an annuity due is FORMULA
1+� �−1 Annuity Due
FV� = PYMNT x �
� 1+� It is an annuity in
which the cash
1+0.08 4−1
STEP 1: FVa = P 25,000 � 0.08
� 1 + 0.08 = flows, or payments,
occur at the
IF MANUAL COMPUTATION: beginning of the
1.08 4−1 period.
FVa = P 25,000 � 0.08
� 1 + 0.08
1.08 � 1.08 � 1.08 � 1.08 −1
FVa = P 25,000 � 0.08
� 1 + 0.08
1.36048896−1
FVa = P 25,000 � 0.08
� 1 + 0.08
0.36048896
FVa = P 25,000 � 0.08 � 1 + 0.08
FVa = P 25,000 x 4.506112 x 1.08 = P 121,665.02
 SAMPLE PROBLEM NO.1 (FV)
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately.
Since you have extra money, you invest additional amounts of P 15,000
at beginning of years 3 and 4. It is expected to earn 8% each year.
What is the anticipated future value of this investment after the full four
years?
FORMULA
Now, we are solving the added payments in this equation. FV� = PV x (1 + i)n
STEP 2: FVYear 3 = P 15,000 x (1+0.08)2 = P 17,496.00
STEP 3: FVYear 4 = P 15,000 x (1+0.08)1 = P 16,200.00
121,665.02 + 17,496.00 + 16,200.00 = P 155,361.02
 SUMMARIZATION
FUTURE VALUE OF A MIXED STREAM
You want to invest 4 annual payments of P 25,000, beginning immediately. Since you have extra money,
you invest additional amounts of P 15,000 at beginning of years 3 and 4. It is expected to earn 8% each
year. What is the anticipated future value of this investment after the full four years?
SOLUTION:
Year 0 1 2 3 4

Cash Invested P 0.00 P 25,000 P 25,000 P 40,000 P 40,000

Cumulative Cash Flows P 25,000 P 50,000 P 90,000 P 130,000

Years to Compound 4 3 2 1

Compounded Value at
P 34,012.22 P 31,492.80 P 46,656.00 P 43,200.00
End of Year 4

The equations to calculate each individual year’s compounded value at the end of the five years are as follows:

FV1 = 25,000 x (1 + 0.08)4 = P 34,012.22

FV2 = 25,000 x (1 + 0.08)3 = P 31,492.80
FV3 = 40,000 x (1 + 0.08)2 = P 46,656.00
FV4 = 40,000 x (1 + 0.08)1 = P 43,200.00

The sum of these individual calculations is P 155,361.02 which is the total value of this stream of invested
amounts plus compounded interest.
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided
to invest five annual payments of P 30,000 that earns 9% annually.
After few years of working in that company, his salary increased. So, he
wants to have additional investment P3,000 for year 4 and P 4,000 for
year 5. How many Mr. Cruz will have after 5 years of investment?

Year 0 1 2 3 4 5

Cash Invested P 0.00 P 30,000 P 30,000 P 30,000 P 33,000 P 34,000

Cumulative Cash
P 30,000 P 60,000 P 90,000 P 123,000 P 157,000
Flows

Years to Compound 5 4 3 2 1
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided
to invest five annual payments of P 30,000 that earns 9% annually.
After few years of working in that company, his salary increased. So, he
wants to have additional investment P3,000 for year 4 and P 4,000 for
year 5. How many Mr. Cruz will have after 5 years of investment?
FORMULA QUESTION:
FV� = PV x (1 + i)n Ø What are the PV or Present Value?
ü P 30,000, P 33,000 and P 34,000
Ø What is the i or Interest Rate?
ü 5% or 0.05
Ø What is the n or number of years to
compound?
ü 5 years
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided to invest
five annual payments of P 30,000 that earns 9% annually. After few years of
working in that company, his salary increased. So, he wants to have additional
investment P3,000 for year 4 and P 4,000 for year 5. How many Mr. Cruz will have
after 5 years of investment?
FORMULA SOLUTION:
FV� = PV x (1 + i)n IF MANUAL COMPUTATION:
FV1 = P 30,000 x (1 + 0.09)5
FV1 = P 30,000 x (1.09)5
FV1 = P 30,000 x (1.05 x 1.05 x 1.05 x 1.05 x 1.05)
FV1 = P 30,000 x 1.538624
FV� = P 46,158.72
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided to invest
five annual payments of P 30,000 that earns 9% annually. After few years of
working in that company, his salary increased. So, he wants to have additional
investment P3,000 for year 4 and P 4,000 for year 5. How many Mr. Cruz will
have after 5 years of investment?
FORMULA SOLUTION:
FV� = PV x (1 + i)n FV1 = P 30,000 x (1 + 0.09)5 = P 46,158.72
FV2 = P 30,000 x (1 + 0.09)4 = P 42,347.46
FV3 = P 30,000 x (1 + 0.09)3 = P 38,850.87
FV4 = P 33,000 x (1 + 0.09)2 = P 39,207.30
FV5 = P 34,000 x (1 + 0.09)1 = P 37,060.00
FV = P 203,624.35
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided to invest five annual
payments of P 30,000 that earns 9% annually. After few years of working in that company, his
salary increased. So, he wants to have additional investment P3,000 for year 4 and P 4,000 for year
5. How many Mr. Cruz will have after 5 years of investment?
ALWAYS REMEMBER: This must give us the same result. The formula for the
future value of an annuity due is
FORMULA SOLUTION:
1+� �−1 1+0.09 5−1
FV� = PYMNT x �
� 1+� FVa = P 30,000 � 0.09
� 1 + 0.09
FVa = P 30,000 � 5.984711 � 1.09
FV = P 195,700.05
 SOLVE THE PROBLEM
FUTURE VALUE OF A MIXED STREAM
Mr. Cruz got hired and earn a lot of money on his job. Mr. Cruz decided to invest five annual
payments of P 30,000 that earns 9% annually. After few years of working in that company, his
salary increased. So, he wants to have additional investment P3,000 for year 4 and P 4,000
for year 5. How many Mr. Cruz will have after 5 years of investment?
ALWAYS REMEMBER: This must give us the same result.
Now, we are solving the added payments in this equation.
FORMULA SOLUTION:
FV� = PV x (1 + i)n = P 3,564.30
FVyear 4 = P 3,000 x (1 + 0.09)2 =
= P 4,360.00
FVyear 5 = P 4,000 x (1 + 0.09)1 =

= P 203,624.35
P 195,700.05 + P 3,564.30 + P 4,360.00 =
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
You win a cash windfall through your state’s lottery. You would
like to take a portion of the funds and place them in a fixed
investment so that you can draw $17,000 per year starting one
year from now and continue to do so for the next two years. At
the end of year 4, you want to withdraw $17,500, and at the end
of year 5, you will withdraw the last $18,000 to close the account.
When you take your last payment of $18,000, your fund will be
totally depleted. You will always be earning 6% annually. How
much of your cash windfall should you set aside today to
accomplish this?
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
You win a cash windfall through your state’s lottery. You would like to take a portion of the funds and
place them in a fixed investment so that you can draw $17,000 per year starting one year from now
and continue to do so for the next two years. At the end of year 4, you want to withdraw $17,500, and
at the end of year 5, you will withdraw the last $18,000 to close the account. When you take your last
payment of $18,000, your fund will be totally depleted. You will always be earning 6% annually. How
much of your cash windfall should you set aside today to accomplish this?

FORMULA QUESTION:
1 Ø What are the FV or Future Value?
PV�= FV x 1+�
�
ü $ 17,000, $ 17,500 and $ 18,000
Ø What is the i or Interest Rate?
ü 6% or 0.06
Ø What is the n or number of years to discount?
ü 5 years
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
NOTE:
Remembering that we are thinking in reverse from the earlier
problems that involved future values. In this case, we’re bringing
future values back in time to find their present values. You will recall
that this process is called discounting rather than compounding.

Regardless of how we solve this, the question remains the same:

How much money must we invest today (present value) to
achieve this?
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
NOTE:
We are calculating present values as we did in previous chapters,
given a known future value “target,” in order to determine how
much money you need today to achieve that goal.
FORMULA: Ordinary Annuity
1 It is an annuity in
1−
which the cash
Present value of an ordinary annuity: �� = ���� �
1+� �

� flows, or payments,
occur at the end
1 of the period.
Present value of a single amount: PV = FV x 1+� �
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM

NOTE: You want to find out how much money you need today to
accomplish your goal. You can also find out how much money you
need to set aside in each period to accomplish this goal. Therefore, we
can address this problem in increments.

Year 0 1 2 3 4 5

Expected amount
to be withdrawn at $ 0.00 $ 17,000 $ 17,000 $ 17,000 $ 17,500 $ 18,000
the end of the year
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
You win a cash windfall through your state’s lottery. You would like to take a portion of the funds and place
them in a fixed investment so that you can draw $17,000 per year starting one year from now and continue
to do so for the next two years. At the end of year 4, you want to withdraw $17,500, and at the end of
year 5, you will withdraw the last $18,000 to close the account. When you take your last payment of
$18,000, your fund will be totally depleted. You will always be earning 6% annually. How much of your
cash windfall should you set aside today to accomplish this?
One method is to take each year’s cash flows, which happen at the end of the
year, and discount them to today using the present value formula for a single
amount: Discounting
FORMULA It is the process of
1
IF MANUAL COMPUTATION: PV�= FV x �
converting a value
1+�
1 received in a future time
PV1 = 17,000 x 1+0.06 1
period to an equivalent
value received
1
PV1 = 17,000 x 1.06 1
immediately.
1
PV1 = 17,000 x 1.06
PV1 = 17,000 x 0.943396226
PV = $ 16,037.74
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
One method is to take each year’s cash flows, which happen at the end of the
year, and discount them to today using the present value formula for a single
amount:
FORMULA
1
PV1 = 17,000 x 1+0.06 1 PV�= FV x
1

1
= $ 16,037.74 1+��

PV2 = 17,000 x 1+0.06 2

= $ 15,129.94
1
PV3 = 17,000 x 1+0.06 3
= $ 14,273.53
1
PV4 = 17,500 x 1+0.06 4
= $ 13,861.64
1
PV5 = 18,000 x 1+0.06 5
= $ 13,450.65
PV = $ 72,753.49
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
FORMULA: IB = RB x Interest Rate
RB = Withdrawn － Interest Rate = answer
Remaining Balance － answer

Year 0 1 2 3 4 5

Expected amount
to be withdrawn at $ 0.00 $ 17,000 $ 17,000 $ 17,000 $ 17,500 $ 18,000
the end of the year

Interest on Balance $ 4,365.21 $ 3,607.12 $ 2,803.55 $ 1,951.76 $ 1,018.87

Remaining Balance $ 72,753.49 $ 60,118.70 $ 46,725.82 $ 32,529.37 $ 16,981.13 $ 0.00

 SAMPLE PROBLEM NO.1 (PV)
Year 0 1 2 3 4 5

Expected amount
to be withdrawn at $ 0.00 $ 17,000 $ 17,000 $ 17,000 $ 17,500 $ 18,000
the end of the year

Interest on Balance $ 4,365.21 $ 3,607.12 $ 2,803.55 $ 1,951.76 $ 1,018.87

Remaining Balance $ 72,753.49 $ 60,118.70 $ 46,725.82 $ 32,529.37 $ 16,981.13 $ 0.00

FORMULA: SOLUTION:
1. IB = RB x Interest Rate $ 72,753.49 x 0.06 = $ 4,365.21
2. Withdrawn － Interest Rate = answer $ 17,000 － $ 4,365.21 = $ 12,634.79
3. RB = Remaining Balance － answer $ 72,753.49 － $ 12,634.79 = $ 60,118.70
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
STEP 1: Find the present value of the annuity using the PVa
1
1−
formula: �� = ���� �
1+� �

�
IF MANUAL COMPUTATION:
1
1−
1 + 0.06 3
��� = $ 17,000 � 0.06
1
1−
1.06 3
��� = $ 17,000 � 0.06
1
1−
��� = $ 17,000 � 1.191016
0.06
1 − 0.839619
��� = $ 17,000 � 0.06
PVa = $ 17,000 x 2.673017 = $ 45,441.29
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
STEP 1: Find the present value of the annuity using the PVa
formula:
1
1−
FORMULA: �� = ���� �
1+� �

�
1
1−
1 + 0.06 3
��� = $ 17,000 � 0.06
1 − 0.839619
��� = $ 17,000 � 0.06
PVa = $ 17,000 x 2.673017 = $ 45,441.29
 SAMPLE PROBLEM NO.1 (PV)
PRESENT VALUE OF A MIXED STREAM
STEP 2: Discount the year 4 and 5 amount using the formula for the
present value of a single amount:
1
FORMULA: PV = FV x 1+� �
1
PV Year 4 = $ 17,500 x 1+0.06 4
= $ 13,861.64
STEP 3:
1
PV Year 5 = $ 18,000 x 1+0.06 5
= $ 13,450.65

45,441.20 + 13,861.64 + 13,450.65 = $ 72,753.49

 SUMMARIZATION
PRESENT VALUE OF MIXED A STREAM
You win a cash windfall through your state’s lottery. You would like to take a portion of the funds and place them in
a fixed investment so that you can draw $17,000 per year starting one year from now and continue to do so for the
next two years. At the end of year 4, you want to withdraw $17,500, and at the end of year 5, you will withdraw
the last $18,000 to close the account. When you take your last payment of $18,000, your fund will be totally
depleted. You will always be earning 6% annually. How much of your cash windfall should you set aside today to
accomplish this?
SOLUTION:
Year 0 1 2 3 4 5

Expected amount to be withdrawn at the end of the

$ 0.00 $ 17,000 $ 17,000 $ 17,000 $ 17,500 $ 18,000
year

Applying the formula for the present value of a single amount, we discount each amount and then add the
discounted amounts. We will simplify this approach with Excel shortly, but we must understand the
reasoning behind discounting uneven cash flow streams with a direct solution.
1
PV1 = 17,000 x 1+0.06 1 = $ 16,037.74
1
PV2 = 17,000 x 1+0.06 2
= $ 15,129.94
1
PV3 = 17,000 x 1+0.06 3
= $ 14,273.53
1
PV4 = 17,500 x = $ 13,861.64
1+0.06 4

1
PV5 = 18,000 x = $ 13,450.65
1+0.06 5

By combining the five discounted amounts above, we get a total present value of $ 72,753. This amount represents
the value today of the five expected cash inflows for as long as our remaining balance is earning 6%.
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
You hire Susan for a five-year term. She has no retirement plan, so you agree to
invest money immediately to allow her a stream of five payments beginning one year
after her employment term ends. Draw a timeline! The money you invest for the full
ten years of this arrangement (five years of employment and five years of
withdrawals) always earns 4% compounded annually. When Susan receives her third
and last payment, the fund will be depleted and equal zero. The three payments she
will receive are as follows:
End of year 6: $ 25,000
End of year 7: $ 25,000
End of year 8: $ 25,000
End of year 9: $ 30,000
End of year 10: $ 37,000
Therefore, your goal is to have enough money in this account at the end of Susan’s
five-year employment term to assure her of receiving these payments.
How much money must you invest today to accomplish this strategy?
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
You hire Susan for a five-year term. She has no retirement plan, so you agree to invest money
immediately to allow her a stream of five payments beginning one year after her employment term
ends. Draw a timeline! The money you invest for the full ten years of this arrangement (five years of
employment and five years of withdrawals) always earns 4% compounded annually. When Susan
receives her third and last payment, the fund will be depleted and equal zero. The three payments she
will receive are as follows:
End of year 6: $ 25,000
End of year 7: $ 25,000 QUESTION:
End of year 8: $ 25,000
End of year 9: $ 30,000 Ø What are the FV or Future Value?
End of year 10: $ 37,000 ü $ 25,000, $ 30,000 and $ 37,000
Ø What is the i or Interest Rate?
FORMULA ü 4% or 0.04
1
PV�= FV x 1+�
�
Ø What is the n or number of years to discount?
ü 5 years
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
NOTE: You want to find out how much money you need to invest
today to accomplish your goal. You can also find out how much
money you need to invest in each period to accomplish this goal.
Therefore, we can address this problem in increments.

Year 0 1 (year 6) 2 (year 7) 3 (year 8) 4 (year 9) 5 (year 10)

Expected amount to be
withdrawn at the end of $ 0.00 $ 25,000 $ 25,000 $ 25,000 $ 30,000 $ 37,000
the year
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
One method is to take each year’s cash flows, which happen at the end of the
year, and discount them to today using the present value formula for a single
amount:

1
PV1 = 25,000 x FORMULA
1+0.04 1
= $ 24,038.46 1
1 PV�= FV x
PV2 = 25,000 x 1+�
�

1+0.04 2
= $ 23,113.91
1
PV3 = 25,000 x 1+0.04 3 = $ 22,224.91
1
PV4 = 30,000 x 1+0.04 4 = $ 25,644.13
1
PV5 = 37,000 x 1+0.04 5 = $ 30,411.30
PV = $ 125,432.71
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
FORMULA: IB = RB x Interest Rate
RB = Withdrawn － Interest Rate = answer
Remaining Balance － answer

Year 0 1 2 3 4 5

Expected amount to
be withdrawn at the $ 0.00 $ 25,000 $ 25,000 $ 25,000 $ 30,000 $ 37,000
end of the year

Interest on Balance $ 5,017.31 $ 4,218.00 $ 3,386.72 $ 2,522.19 $ 1,423.07

Remaining Balance $ 125,432.02 $ 105,450.02 $ 84,668.02 $ 63,054.74 $ 35,576.93 $ 0.00

 SOLVE THE PROBLEM
Year 0 1 2 3 4 5

Expected amount to
be withdrawn at the $ 0.00 $ 25,000 $ 25,000 $ 25,000 $ 30,000 $ 37,000
end of the year

Interest on Balance $ 5,017.31 $ 4,218.00 $ 3,386.72 $ 2,522.19 $ 1,423.07

Remaining Balance $ 125,432.02 $ 105,450.02 $ 84,668.02 $ 63,054.74 $ 35,576.93 $ 0.00

FORMULA: SOLUTION:
1. IB = RB x Interest Rate $ 125,432.02 x 0.04 = $ 5,017.31
2. Withdrawn － Interest Rate = answer $ 25,000 － $ 5,017.31 = $ 19,982.69
3. RB = Remaining Balance － answer $ 125,432.02 － $ 19,982.69 = $ 105,450.02
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
STEP 1: Find the present value of the annuity using the PVa
formula:
FORMULA
1
1−
1+� �
��� = ���� �
�

1
1−
1 + 0.04 3
��� = $ 25,000 � 0.04
PVa = $ 25,000 x 2.775091 = $ 69,377.28
 SOLVE THE PROBLEM
PRESENT VALUE OF A MIXED STREAM
STEP 2: Discount the year 4 and 5 amount using the formula for the
present value of a single amount:
FORMULA
1
PV�= FV x 1+�
�

1
PV Year 4 = $ 30,000 x 1+0.04 4
= $ 25,644.13
STEP 3:
1
PV Year 5 = $ 37,000 x 1+0.04 5
= $ 30,411.30

$ 69,377.28 + $ 25,644.13 + $ 30,411.30 = $ 125,432.71

THANK YOU FOR
LISTENING!