TIME VALUE OF MONEY

Considers 3 factors
1. Principal – refers to the sum borrowed or invested
2. Interest Rate – the ratio between the interest earned in a certain unit of time and the principal
3. Time period or term – the period for which the money is to be used

Future Value techniques – measures cash flows at the end of a project’s life.
Compounding is used to find the future value of each cash flow at the end of investment’s life
and the sums these values to find the investment’s future value.
Present Value techniques – measures cash flows at the start of a project’s life.
Discounting is used to find the PV of each cash flow at time zero and the sums these values to
find the investment’s value today.

FUTURE VALUE
- The value at a given future date of a present amount placed on a deposit today and earning
interest at a specified rate is called future value.
FVn = PV x (1 + i) ^n

PRESENT VALUE
- The current peso amount of a future amount is the present value.
PV = FVn / (1 + i)^n or PV = FVn (1 + 1)^-n

ANNUITIES
- Sequence of a equal periodic payments which are made at equal intervals of time.
2 basic types of annuities
a. Ordinary Annuity – the cash flow at the end of each period.
b. Annuity due – the annuity for which the cash flow occurs at the beginning of each period.