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Hoskold Formula

The document presents Hoskold's Formula, which is used to calculate the present value of an annuity. It gives the terms and variables used in the formula, including present value (Vp), safe rate of redemption (i), speculative rate for purchaser (i'), annuity amount (A), life/number of payment periods (n), and years of deferment (m). It then works through sample problems applying the formula to calculate the present value of annuities with and without deferment periods.

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GodShot Shaiya
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3K views12 pages

Hoskold Formula

The document presents Hoskold's Formula, which is used to calculate the present value of an annuity. It gives the terms and variables used in the formula, including present value (Vp), safe rate of redemption (i), speculative rate for purchaser (i'), annuity amount (A), life/number of payment periods (n), and years of deferment (m). It then works through sample problems applying the formula to calculate the present value of annuities with and without deferment periods.

Uploaded by

GodShot Shaiya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Hoskold’s Formula

Non Deferred
A
Vp 
i
 i '
(1  i )  1
n

Vp = present value
i = safe rate on redemption of capital
i’ = speculative rate to purchaser on his
capital investment.
A = annuity to be purchased
n = life
Sample Problem:

What is the present value of an annuity of 500


pesos per year for 10 years with redemption of
capital at 4% and with interest allowed
purchaser at 10%.
Solution Given:
A = 500
n = 10
i = 0.04
i’ = 0.10

500
Vp 
0.04
 0.10
(1  0.04)  1
10

Vp = 2,728.00
Hoskold’s Formula

Deferred
A Vp = present value
i = safe rate on redemption of
i capital
 i' i’ = speculative rate to
(1  i )  1
n purchaser on his
Vp  capital investment.

(1  i" ) m i” = interest on capital during


deferment
A = annuity to be purchased
n = life
m = years of deferment
Sample Problem

What is the present value of an annuity of 25


pesos per year which will have a life of 20 years
after a deferment period of 10 years which will
permit redemption of capital at 4% and which
will allow the purchaser interest at 8% during
the life of the annuity and at 6% during the
deferment period?
Solution:
Given:
A = 25
25 n = 20
m = 10
0.04 i = 0.04
 0.08 i’ = 0.08
(1  0.04)  1
20 i” = 0.06
Vp 
(1  0.06)10

Vp = 122.89
Exercises:
1. A small mine, fully equipped and producing
30,000 tons of ore per year at a net profit of 1
peso per ton, is offered for sale. A fair estimate
of ore reserves gives the property a life of 15
years. Assuming that the purchaser wants an
interest return of 12% with redemption of
capital at 5%. What price will he offer for the
property?
2. It is estimated that the mine can produce
100,000 tons of ore per year at a net profit of
20 centavos per ton. Tonnage reserve is
calculated to be 2,000,000 tons. What is the
present value of the mine in order to allow an
8% return on capital with redemption at 3%?
3. A mining company wishes to sell an idle mine
which under normal operating conditions can
produce 300,000 tons of ore per year. The
mine is fully equipped, but because of trade
conditions it is considered inadvisable to start
operating
before 5 years. An examination of the property
reveals a reserved of 3,000,000 tons of ore and
estimates the average net profit at 20 centavos
per ton. No critical difficulties are anticipated in
the operation. What is the present value of the
property if the purchaser desires 10% on his
investment during the life of the mine, 7%
during the deferment period and redemption of
his capital at 5%?

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