TIME VALUE

OF MONEY
 • If I would give you Php 1
The Million, and I could either
give it to you NOW or A
YEAR AFTER, would
Question: rather have it now or
later?
 Time Value of Money

The idea that money at the present The time value of money says This is true because a peso
time is worth more that the same that a peso received TODAY is received today can be INVESTED
amount in future due to its worth MORE than a peso to earn interest.
potential earning capacity. received TOMORROW.
Present Value vs. Future Value

Present Value Future Value

The current worth The value of an asset

of a future sum of or cash at a specified
money or stream of date in the future that
cash flows given a is equivalent in value
specified rate of to a specified sum
return today
 The greater the rate, the larger
Interest Rate the interest, and as a result,
Therefore, the future value

the difference
between the
two values The longer the money is left in
depends on Time the account, the more interest it
gains.
two factors:
 PV vs FV Exercises
• At the beginning of the year, BRB invested
P100,000 in a certificate of deposit for one year at
12% interest per annum. What will be the value of
the said investment at the end of the year?
𝐹𝑉 = 𝑃[1 + 𝑖 ]
PV FV
= 100,000[1 + 12% ]
P100,000 P100,000x1.12 P112,000 = 1000,000 1.12

𝑭𝑽 = 𝟏𝟏𝟐, 𝟎𝟎𝟎
 PV vs FV Exercises
• At the beginning of the year, BRB invested in a
certificate of deposit for one year at 12% interest
per annum. BRB will receive a total amount of
P112,000 (principal investment plus interest). What
could have been the amount invested by BRB at
the beginning of the year?
P𝑉 = 𝐹𝑉/[1 + 𝑖 ]

PV FV = 112,000/[1 + 12% ]

= 112,000/1.12
P100,000 P100,000/1.12 P112,000
𝐏𝑽 = 𝟏𝟎𝟎, 𝟎𝟎𝟎
 SI = Simple interest
𝑃 = Principal or Present Value
Simple i = interest rate per time period
Interest t = number of time periods

𝑺𝑰 = 𝑃(𝒊)(𝒕)
 Interest that accrues on the initial
principal and the accumulated
interest of a principal deposit, loan
or debt.

Compounding of interest allows a

Compound principal amount to grow at a

faster rate than simple interest,
which is calculated as a percentage
Interest of only the principal amount.

This method computes interest

more than once during the term of
the loan or investment. It is, as if
the interest itself after been
accrued also earns an interest
• Compound Interest • Compound Amount

Is the difference between Is the final sum-principal

the compound amount plus accumulated interest
and the original principal. at the end of the period
of the borrowing.
 A = Compound Amount or Future Value
The P = Principal or Present Value
Compound i = Interest rate per period
Amount n = Total compounding periods
Formula A=𝑷 𝟏+𝒊 𝒏
Example
𝐴 = 𝑃(1 + 𝑖)𝑛
At the beginning of the
year, P2,000 was 𝐴 = 2,000(1 + 0.08)2
invested at a deposit
account earning 8%
𝐴 = 2,000 1.1664
compounded annually,
for 2 years. How much
will the investment be 𝑨 = 𝟐, 𝟑𝟑𝟐. 𝟖𝟎
after 2 years?
 PV = Principal or Present Value
Present A = Compound Amount or Future Value
Value i = Interest rate per period
n = Total compounding periods
Using the
Formula 𝑷𝑽 =
𝑨
(𝟏 + 𝒊)𝒏
Example 𝐴
𝑃𝑉 =
(1 + 𝑖)𝑛
At the beginning of the
year, you invested at a 2,332.80
deposit account earning 8%, 𝑃𝑉 =
compounded annually, for (1 + 0.08)2
2 years. At the end of the 2
year period, the deposit 2,332.80
𝑃𝑉 =
would already be (1.1664)
P2,332.80. What could have
been the amount invested 𝑷𝑽 = 𝟐, 𝟎𝟎𝟎. 𝟎𝟎
in the beginning of the
year?
TIME VALUE OF MONEY
Annuities (Future Value
& Present Value)
 • Series of periodic payments
(or receipts), usually made
in equal amounts. The
payments are computed by
Annuities the compound interest
method and are made at
equal intervals of time, such
as annually, semi-annually,
quarterly, or monthly.
 Classifications of Annuities

Periodic payments are made at the Ordinary

end of each payment interval. Annuity

Periodic payments are made at the

beginning of each payment interval.
Annuity Due
 FVOA = Future value of ordinary annuity
The FV of Pmt = Annuity payment
Ordinary i = interest rate period
Annuity n = number of compounding periods

Formula 𝑭𝑽𝑶𝑨 = 𝑷𝒎𝒕 𝒙

(𝟏 + 𝒊)𝒏 −𝟏
𝒊
 (1 + 𝑖)𝑛 −1
Example 𝐹𝑉𝑂𝐴 = 𝑃𝑚𝑡 𝑥
𝑖

On January 1, 2020, BRB

arranged to invest in an (1 + 0.12)3 −1
account that will earn 12% 𝐹𝑉𝑂𝐴 = 100,000 𝑥
interest compounded annually. 0.12
The investment is for 3 years 1.4049 − 1
ending December 31. 2020. 𝐹𝑉𝑂𝐴 = 100,000 𝑥
BRB plans to deposit P100,00 0.12
each year for 3 years or a total
of P300,000, beginning 𝐹𝑉𝑂𝐴 = 100,000 𝑥 3.3744
December 31 thereof. How
much balance will the 𝑭𝑽𝑶𝑨 = 𝑷𝟑𝟑𝟕, 𝟒𝟒𝟎
investment have o December
31, 2022?
 FVAD = Future value of annuity due
The FV of Pmt = Annuity payment
Annuity i = interest rate period
Due n = number of compounding periods

Formula 𝑭𝑽𝑨𝑫 = 𝑷𝒎𝒕 𝒙

𝟏+𝒊 𝒏−𝟏
𝒙(𝟏 + 𝒊)
𝒊
 (1 + 𝑖)𝑛 −1
Example 𝐹𝑉𝐴𝐷 = 𝑃𝑚𝑡 𝑥
𝑖
𝑥 (1 + 𝑖)

On January 1, 2020, BRB

arranged to invest P300,000 in 1 + 0.08 4 − 1
a 4-year certificate of deposit 𝐹𝑉𝐴𝐷 = 75,000 𝑥 𝑥(1 + 0.08)
requiring 4 annual deposit of 0.08
P75,000 for next four years
beginning January 1, 2020, and 1.3605 − 1
𝐹𝑉𝐴𝐷 = 75,000 𝑥 𝑥(1 + 0.08)
every January 1 thereafter. The 0.08
investment earns 8% interest
compounded annually and will 𝐹𝑉𝐴𝐷 = 75,000 𝑥 4.5061 𝑥 1.08
mature on December 31, 2023.
What will be the value of the 𝑭𝑽𝑨𝑫 = 𝑷𝟑𝟔𝟒, 𝟗𝟗𝟒. 𝟏𝟎
said investment at the end of its
4-year maturity?
 PVOA = Present value of ordinary annuity
The PV of Pmt = Annuity payment
Ordinary i = interest rate period
Annuity n = number of compounding periods

Formula 𝑷𝑽𝑶𝑨 = 𝑷𝒎𝒕 𝒙

𝟏 − [𝟏/(𝟏 + 𝒊)𝒏 ]
𝒊
Example 𝑃𝑉𝑂𝐴 = 𝑃𝑚𝑡 𝑥
1 − [1/(1 + 𝑖)𝑛 ]
𝑖
BRB arranged to invest 4-year
investment that will provide 1 − [1/1.114 ]
P75,000 cash annually that he 𝑃𝑉𝑂𝐴 = 75,000 𝑥
0.11
will collect every December 31 of
each year beginning December 1 − (0.658731)
31, 2020. The investment earns 𝑃𝑉𝑂𝐴 = 75,000 𝑥
11% interest compounded 0.11
annually and will mature on
December 31, 2023. How much P𝑉𝑂𝐴 = 75,000 𝑥 3.102446
should be invested on January 1,
2020 in order to received 𝑷𝑽𝑶𝑨 = 𝑷𝟐𝟑𝟐, 𝟔𝟖𝟑. 𝟒𝟑
P75,000 annually?
 PVAD = Present value of annuity due
The PV of Pmt = Annuity payment
Annuity i = interest rate period
n = number of compounding periods
Due
Formula 𝑷𝑽𝑨𝑫 = 𝑷𝒎𝒕 𝒙
𝟏 − [𝟏/(𝟏 + 𝒊)𝒏−𝟏 ] + 𝟏
𝒊
 1 − [1/(1 + 𝑖)𝑛−1 ] + 1
Example 𝑃𝑉𝐴𝐷 = 𝑃𝑚𝑡 𝑥
𝑖
On January 1, 2020, BRB 1
arranged to invest in a 4-year 1 − [1.08)4−1 ]
certificate of deposit which will 𝑃𝑉𝐴𝐷 = 32,500 𝑥 +1
provide each payout of P32,500 0.08
annually for the next four years
beginning January 1, 2020 and 1 − (0.793832)] + 1
every January thereafter. The 𝑃𝑉𝐴𝐷 = 32,500 𝑥
investment earns 8% interest 0.08
compounded annually and will
mature on December 31, 2023. 𝑃𝑉𝐴𝐷 = 32,500𝑥 2.577097 + 1
What amount is needed to be
invested on January 1, 2020 to
provide sufficient amount of 𝑷𝑽𝑨𝑫 = 𝟏𝟏𝟔, 𝟐𝟓𝟓. 𝟔𝟓
payout desired?
Finding the Size of Each Periodic Payment

(𝟏 + 𝒊)𝒏 −𝟏
𝑭𝑽𝑨 = 𝑷𝒎𝒕 𝒙
𝒊

𝐹𝑉𝐴
𝑃𝑚𝑡 =
(𝟏 + 𝒊)𝒏 −𝟏
𝒊