Business Finance Module 5: Time Value of Money

What Have I Learned So Far?

Calculate the present value of each investment:

1. Principal amount of P500,000 invested for 5 years at 10% discount rate

𝐹𝐹𝐹𝐹𝐹𝐹
PV =
(1+𝐼𝐼)𝑛𝑛

500,000
=
(1.1)5

= P 310,460.66

2. Principal amount of P500,000 invested for 10 years at 5% discount rate

𝐹𝐹𝐹𝐹𝐹𝐹
PV = 𝑛𝑛
(1+𝐼𝐼)

500,000
=
(1.05)10

= P 306,956.63

3. Which of the two investments above yields a higher present value?

- The first investment.

What Have I Learned So Far?

1. What is an annuity?
- It is a series of equal payments at fixed intervals for a specified number of periods.

2. Differentiate between ordinary annuity and annuity due

- Ordinary annuity is the type of annuity where payments occur at the end of the
period on the other hand annuity due is the type of annuity where payments occur
at the beginning of each period.
3. In what instances will ordinary annuity apply instead of annuity due?
- When an individual is paying interest, an ordinary annuity is the best option.
 4. In what instances will annuity due apply instead of ordinary annuity?
- When a person acquires money the annuity due is suitable.

What Have I Learned So Far?

Suppose you have just landed your first job. One of your medium-term goals is to
buy a car five years from now. To that end, you plan to save P20,000 every year for the
next five years. You will deposit P20,000 at the end of year in a savings account that
gives a 3% rate of return compounded annually. You plan to use your savings at the end
of five years as down payment for the car you want. You will then amortize the balance
using the portion of your monthly salary.

1. Draw a timeline that illustrates the given situation.

0 1 2 3 4 5
- Period I 3% I I I I I

Savings 20,000 20,000 20,000 20,000 20,000

2. How much will you have by the end of five years?

0 1 2 3 4 5
- Period I 3% I I I I I

Savings 20,000 20,000 20,000 20,000 20,000

20,600 ⇐
21,218 ⇐
21,854.54 ⇐
22,510.18 ⇐
23,185.48 ⇐
P 109,368.20
What Have I Learned So Far?

You availed of a five-year student loan amounting to P500,000 with 5% interest

rate. Create an amortization table. Payments are made at the end of each year.

Repayment Ending
Year Beginning Payment Interest of Principal Balance
Amount
1 500,000 115,487.40 25,000 90,487.40 409,512.60
2 409,512.60 115,487.40 20,475.63 95,011.77 314,500.83
3 314,500.83 115,487.40 15,725.04 99,762.36 214,738.47
4 214,738.47 115,487.40 10,736.92 104,750.48 109,987.99
5 109,987.99 115,487.40 5,499.40 109,988 0