Equations of value

In business transactions, it is sometimes necessary to

exchange one set of obligations for another set of
different amounts due at different times. In order to do
this, it is necessary to bring all of the obligations (the
original set and the new set) to a common date called the
comparison date. Then an equation of value is set up by
equating the original set of obligations with a new set at
the coparison date. The equation of value is based on the
concept that two sets of obligations which are equivalent
on one date are equivalent on any other dates. That the
sum of one set of obligations on a certain comparison
date is equal to the sum of another set on the same date. A
time diagram is very useful in solving an equation of
value.
The following steps can be used in solving equations of
value prbolems:
1. Represent the unknown by x.
2. Make a time diagram. Write the original set of
obligations on one side of the time scale and the
new set on the other side of the time scale.
3. Choose a comparison date (or a CD - usually a
payment date). The CD must be choses such that
the computations is simplified.
4. Bring all values to the comparison date either
accumulating or discounting. Write the equations of
values using the concept of
All pyments = All debts

5. Instead of taking Php30,000.00 cash from an

insurance policy, a beneficiary chooses to take three
annual payments, the first to be made now. If the
insurance company pays 8% efective on the money
left with them, what is the size of the payments?
6. For the following obligations: (a) Php80,000.00 due
at the end of 3 years with accumulated interest at
16% compounded semi annually and (b)
Php40,000.00 due in 8 years and 6 months. What two
equal payments at the end of 2 and 5 years will
discharge these obligations if money is worth 12%
compounded quarterly?
7. A brand new car was bought for Php1,800,000.00.
The buyer pays Php300,00.00 cash. He signs a note
with a maturity of Php500,000.00 due in 1 year and a
second note with a maturity value of Php50,000.00
due in 1.5 years. If the seller charges interest on the
debt at 20% compounded quarterly, what should be
the maturity value of a third note due in 3 years that
will pay off the remainder of the debt?
8. Ian owes Php500,000.00 due in 3 years and
Php800,000.00 due in 5 years. If money is worth
14% compounded semi annually, what single
payment 4 years from now will settle these
obligations?

Exercises:

9. A man borrows Php1,000,000.00 on March 1. 2014

Agreeing to pay 14% compounded semi anually. He
pays Php400,000 on September 1, 2015. How much
will he have to pay to settle the debt on March 1,
2016?

1. Mr. Ang owes Mr. Tan Php50,000 due at the end of 3

years and Php80,000.00 due at the end of 7 years. Mr.
Ang is allowed to replace these obligations by a
single payment at the end of 5 years. How much
should he pay on the fifth year if money is worth
14% compounded semi annually?

10. If money is worth 16% compounded quarterly, find a

single payment which would replace the following
obligations at the end of three years:
a. Php25,000.00 due at the end of 2 years
b. Php15,000.00 due at the end of 2.5 years
c. Php10,000 due at the end of 3 years

2. A man owes Php50,000.00 due in 3 years with an

interest of 10% compounded quarterly and
Php10,000.00 due in 5 years with an interest at 12%
compounded semi annually. If money is worth 8%
effective, what single payment at the end of 6 years
will equitably replace these two debts?

11. Rose owes Mylene the following obligations: (a)

Php20,000.00 due at the end of 3 years and (b)
Php80,000.00 at the end of 7 years with interest at
12% effective. Rose replaces these by a payment of
Php25,000 at the end of 2 years and a second
payment at the end of 5 years. Find the second
payment if money is worth 14% effective.

5. Solve fo the unknown.

3. A man owes Php75,000.00 due now. The lender

agrees to let him pay his obligations with two equal
payments due after 1 and 2 years respectively. If
money is worth 12% compounded semi annually,
how much would be his payments?
4. A man owes the following obligations: (a) Php60,000
due in 3 years at 16% compounded semi annually and
(b) Php30,000.00 due in 6 years with accumulated
interest from today at 14% compounded quarterly. If
the man was allowed to replace these obligations by a
payment of Php50,000 on the second year and
another payment at the end of 5 years, how much us
the second payment if money is worth 16%
compounded semi annually?

12. A father invests Php200,000.00 at 16% compounded

semi annually on his sons 10th birthday. If the
money is paid to the son in 4 annual payments
starting on his 16th birthday, what wouldbe the size
of each payment?
13. A man owes Php300,000.00 due at the end of 2 years
and another Php300,000.00 due at the end of 3 years.
He wished to pay these two obligations with a single
payment due at the end of 2.5 years. If money is
worth 12% compounded semi annually, what will be
the size of the payment?