Time Value of Money

• The idea that money available at the present time is worth more than
the same amount in the future due to its potential earning capacity
• The time value of money says that a peso received TODAY is worth more
than a peso received TOMORROW.
Present Value vs. Future Value
Present Value Future Value

• The current worth of a future • The value of an asset or cash at

sum of money or stream of cash specified date in the future that
flows given a specified rate of is equivalent in value to specified
return. sum today.
 Present Value vs. Future Value

PV FV
• At the beginning
of the year, you
deposited
₱100,000 earning
₱100,000 ₱112,000
12% annually?
How much will
the deposit be
after a year? 100,000
Interest (100,000 x 12%) 12,000
112,000

or 100,000 x 1.12 = 112,000

 Present Value vs. Future Value

PV FV
• At the end of the
year, a deposit
account earning
10% annually
amounted to ₱?
₱100,000 ₱110,000
₱110,000. How
much was
deposited at the 100,000
beginning of the Interest (100,000 x 10%) 10,000
year? 110,000

110,000 / 1.10 = 100,000

Present Value vs. Future Value

PV FV

Difference between PV and FV

₱100,000 ₱10,000 ₱110,000
Interest
Two Factors:
• Interest Rates
• Time
Compound Interest
• Interest that accrues on the initial principal and the accumulated
interest of a principal deposit , loan or debt.
• Compounding of interest allows a principal amount to grow at a faster
rate than simple interest, which is calculated as a percentage of only the
principal amount.
 Compound Interest
0 1 2
At the beginning of
the year, ₱100,000
was invested at a
deposit account
earning 8% ₱100,000 ₱108,000 ₱116,640
compounded
annually, for two
years. How much
will the investment 100,000
be after two years? Interest (100,000 x 8%) 8,000
108,000
108,000
Interest (108,000 x 8%) 8,640
116,640
FUTURE VALUE
PRESENT VALUE
Present Value
Example Solution

• At the beginning of the year, you

𝐹𝑉
invested at a deposit account 𝑃𝑉 =
earning 8%, compounded (1 + 𝑖)
annually, for 2 years. At the end of
the 2 year period, the deposit 𝑃𝑉 =
134,136
would already be P134,136. What (1 + .08)
could have been the amount
invested in the beginning of the 𝑃𝑉 = 115,000
year?
Future Value and Present Value

Example Solution

• At the beginning of the year, A

invested P80,000 in a certificate
of deposit for three years at 12%
interest compounded annually.
𝐹𝑉 = 80,000(1 + .12)
What will be the value of the said
invested at the end of three
years? 𝐹𝑉 = 112,394.24
Future Value and Present Value

Example Solution

• You invested P88,000 for four

years at the TDGB Credit Union at
10% interest compounded
annually. What will your
𝐹𝑉 = 88,000(1 + .10)
investment worth after four
years?
𝐹𝑉 = 128,840.80
Future Value and Present Value
Example Solution

• At the beginning of the year, you

𝐹𝑉
invested at a deposit account 𝑃𝑉 =
earning 12%, compounded (1 + 𝑖)
annually, for 4 years. At the end of
the 4 year period, the deposit 𝑃𝑉 =
120,000
would already be P120,000. What (1 + .12)
could have been the amount
invested in the beginning of the 𝑃𝑉 = 76,262.17
year?
Annuities
• Series of periodic payments (or receipts), usually made in equal
amounts. The payments are computed by the compound interest
method and are made at equal intervals of time, such as annually, semi-
annually, quarterly, or monthly.
• Classification:
A. Ordinary Annuity - periodic payments are made at the end of each payment
interval.
B. Annuity Dues - periodic payments are made at the beginning of each payment
interval.
Annuities (Future Value)
• Ordinary Annuity
• On January 1, 2020, C arranged to
invest in an account that will earn
12% interest compounded
annually. The investment is for 3
years ending December 31, 2022.
C plans to deposit P100,000 each
year for 3 years or a total of
P300,000, beginning December
31, 2020 and every December
31 thereof.
• Annuity Due
• On January 1, 2020, C arranged to
invest in an account that will earn
12% interest compounded
annually. The investment is for 3
years ending December 31, 2022.
C plans to deposit P100,000 each
year for 3 years or a total of
P300,000, beginning January 1,
2020 and every January 1
thereof.
Future Value of Ordinary Annuity
• On January 1, 2020, C arranged to invest in an account that will earn
12% interest compounded annually. The investment is for 3 years
ending December 31, 2022. C plans to deposit P100,000 each year for 3
years or a total of P300,000, beginning December 31, 2020 and every
December 31 thereof.
Jan. 1, Dec. 31, Dec. 31, Dec. 31,
2020 2020 2021 2022

100,000 x 1.12 112,000

100,000
212,000 x 1.12 237,440
100,000
337,440
Formula for Future Value of Ordinary Annuity
Future Value of Annuity Due
• On January 1, 2020, C arranged to invest in an account that will earn
12% interest compounded annually. The investment is for 3 years
ending December 31, 2022. C plans to deposit P100,000 each year for 3
years or a total of P300,000, beginning January 1, 2020 and every
January 1 thereof.
Jan. 1, Dec. 31, Dec. 31, Dec. 31,
2020 2020 2021 2022

100,000 x 1.12 112,000

100,000
212,000 x 1.12 237,440
100,000
337,440 x 1.12 377,932.80
Formula for Future Value of Annuity Due
 Jan. 1, Dec. 31, Dec. 31, Dec. 31,
FV Ordinary 2020 2020 2021 2022
Annuity
100,000 x 1.12 112,000
100,000 237,440
212,000 x 1.12 100,000
337,440

Jan. 1, Dec. 31, Dec. 31, Dec. 31,

2020 2020 2021 2022
FV Annuity
Due
100,000 x 1.12 112,000
100,000 237,440
212,000 x 1.12 100,000
337,440 x 1.12 377,932.80
Annuities (Present Value)
• Ordinary Annuity
• You want to receive P50,000
annually for the next three years.
How much must be deposited
now, at 9% compounded
annually, to yield an annuity
payment of P50,000 at the end
of each year, for 3 years?
• Annuity Due
• On January 1, 2020, C arranged to
invest in an account that will earn
12% interest compounded
annually. The investment is for 3
years. C wishes to withdraw
P100,000 each year for 3 years or
a total of P300,000 from the
investment, beginning January
1, 2020 and every January 1
thereof. How much should the
investment have on January 1,
2020?
Present Value of Ordinary Annuity
• You want to receive P50,000 annually for the next three years. How
much must be deposited now, at 9% compounded annually, to yield an
annuity payment of P50,000 at the end of each year, for 3 years?

Year Year Year Year

0 1 2 3

(50,000) (50,000) (50,000)

45,871.56 ÷1.09
42,084.00 ÷ 1.09
38,609.17 ÷ 1.09
126,564.73
Present Value of Ordinary Annuity
Year Year Year Year
0 1 2 3
(50,000) (50,000) (50,000)

45,871.56 ÷1.09
42,084.00 ÷ 1.09
38,609.17 ÷ 1.09
126,564.73
Year Year Year Year
0 1 2 3

126,564.73𝑥1.09 137,955.56
(50,000.00)
87,955.56 𝑥1.09 95,871.56
(50,000.00)
45,871.56 𝑥1.09 50,000.00
(50,000.00)
0.00
Formula for Present Value of Ordinary Annuity
Present Value of Annuity Due
• On January 1, 2020, C arranged to invest in an account that will earn
12% interest compounded annually. The investment is for 3 years. C
wishes to withdraw P100,000 each year for 3 years or a total of
P300,000 from the investment, beginning January 1, 2020 and every
January 1 thereof. How much should the investment have on January 1,
2020? Year Year Year Year
0 1 2 3

100,000 100,000 100,000

89,285.71 ÷1.12
79,719.39 ÷ 1.12

269,005.10
Formula for Present Value of Annuity Due

( . )
.
Perpetuities
• A perpetuity is simply an annuity with an extended life. In computing for
annuities, the payments or receipts are to be made over some
predetermined time frame. However, there are annuities that may go on
indefinitely or perpetually. This type of annuity is referred to as
perpetuities.

•
PV of Uneven Cash Flows

Example:
The following annual payments of notes payable of Dorothy Company with
8% discount rate. What is the present value of the annual payment?
Series of future values of
Period
amounts to be paid
1 200,000
2 250,000
3 300,000
4 375,000
5 375,000
6 375,000
7 375,000
PV of Uneven Cash Flows
FV of Uneven Cash Flows
Example:
• Assume that Rose Company is to make an investment of uneven cash
payments for four years. The interest for this investment was 9% and
the investment is made every year-end. What is the future value of this
annuity? Consider the data below:
Period Amount Invested
1 200,000
2 250,000
3 300,000
4 325,000
FV of Uneven Cash Flows
Single Payment (Compound Interest)
Annuities
Future Value and Present Value
Example Solution

• On January 1, 2020, A arranged to

invest in an account that will earn (1 + 𝑖) −1
𝐹𝑉 = 𝑃𝑀𝑇 𝑥
10% interest compounded annually. 𝑖
The investment is for 4 years ending
December 31, 2024. A plans to (1 + .10) −1
𝐹𝑉 = 20,00 𝑥
deposit P20,000 each year for 4 .10
years or a total of P80,000,
beginning December 31, 2020 and
every December 31 thereof. How 𝐹𝑉 = 92,820.00
much balance will the investment
have on December 31 2024.