PAMANTASAN NG LUNGSOD NG MAYNILA

(University of the City of Manila)

Intramuros, Manila

Course Title: Financial Management 1

Professor: John Mark I. Pestaño

Time Value of Money Equations

Future Value: 𝐹𝑉𝑛 = 𝑃𝑉 × (1 + 𝑟)𝑛

1
Present Value: 𝑃𝑉 = 𝐹𝑉𝑛 [ ]
(1+𝑟)𝑛

(1+𝑟)𝑛
Future value of an annuity: 𝐹𝑉𝑛 = 𝑃𝑀𝑇[ ]
𝑟

1−(1+𝑟)−𝑛
Present value of an annuity: 𝑃𝑉 = 𝑃𝑀𝑇[ ]
𝑟

(1+𝑟)𝑛 −1
Future value of an annuity due: 𝐹𝑉𝑛 (𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒) = 𝑃𝑀𝑇[ ](1 + 𝑟)
𝑟

1−(1+𝑟)−𝑛
Present value of an annuity due: 𝑃𝑉(𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒) = 𝑃𝑀𝑇[ ](1 + 𝑟)
𝑟

𝑞𝑢𝑜𝑡𝑒𝑑 𝑟𝑎𝑡𝑒 𝑚
Effective annual return: 𝐸𝐴𝑅 = [1 + ] −1
𝑚

𝑟
Future value of a single payment with nonannual compounding: 𝐹𝑉𝑛 = 𝑃𝑉(1 + )𝑚𝑛
𝑚

𝑃𝑃
Present value of a perpetuity: 𝑃𝑉 =
𝑟

Notations:

𝐹𝑉𝑛 = 𝑡ℎ𝑒 𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑛 𝑦𝑒𝑎𝑟𝑠

𝑛 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑢𝑛𝑡𝑖𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑤𝑖𝑙𝑙 𝑏𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑜𝑟 𝑑𝑢𝑟𝑖𝑛𝑔 𝑤ℎ𝑖𝑐ℎ 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑐𝑐𝑢𝑟𝑠

𝑟 = 𝑡ℎ𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑟 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒

𝑃𝑉 = 𝑡ℎ𝑒 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑢𝑡𝑢𝑟𝑒 𝑠𝑢𝑚 𝑜𝑓 𝑚𝑜𝑛𝑒𝑦

𝑚 = 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑖𝑚𝑒𝑠 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑜𝑐𝑐𝑢𝑟𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

𝑃𝑀𝑇 = 𝑡ℎ𝑒 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑒𝑑 𝑜𝑟 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑦𝑒𝑎𝑟

𝑃𝑃 = 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡 𝑝𝑟𝑜𝑣𝑖𝑑𝑒𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦