1

2
• Present Value
• Future Value
• Annuities
• Perpetuity
• Uneven Cash Flow

3
TVM is also called as Present Discounted Value:

A dollar was worth more yesterday than today and a dollar today is worth more
than a dollar tomorrow.

In TVM, we apply the concept of COMPOUNDING OF INTEREST

4
The concept of the time value of money (TVM) is predicated on the fact that it is possible to earn
interest income on cash that you decide to deposit in an investment or interest-bearing account. As
times goes by, interest is earned on amounts you have invested (present value), which effectively
means that time will add value (future value) to your savings. The longer the period of time you
have your money invested, the more interest income will accrue. Also, the higher the rate of interest
your account or investment is earning, again, the more your money will grow.

5
Opportunity cost is the profit lost when one
alternative is selected over another. The
concept is useful simply as a reminder to
examine all reasonable alternatives before
making a decision.

For example, you have $1,000,000 and

choose to invest it in a product line that will
generate a return of 5%. If you could have
spent the money on a different investment
that would have generated a return of 7%,
then the 2% difference between the two
alternatives is the foregone opportunity cost
6
of this decision.
Simple Interest - is an interest calculated on the principal portion of a loan or the original
contribution to a savings account. Simple interest does not compound, meaning that an account
holder will only gain interest on the principal, and a borrower will never have to pay interest on
interest already accrued.
The formula for calculating simple interest is:
Principal * Interest Rate * Term of the loan

Simple interest example:

Kara takes out a new short-term personal loan. The loan is a

$20,000 auto loan with 3 percent interest for five years.
7
 Compound Interest – it is when the interest you earn on a balance in a savings or investing
account is reinvested, earning you more interest. As a wise man once said, “Money makes money.
And the money that money makes, makes money.”
Compound interest example (The dividend rate used is 7.5%):

One-time contribution with yearly dividend payout One-time contribution with compounding savings

8
Timelines are essential when you are first learning time
value concepts, but even experts use them to analyze
complex finance problems, it is a very useful tool for an
analysis of the time value of money because it provides a
visual for setting up the problem. It is simply a straight line
that shows cash flow, its timing, and interest rate.

9
 Simple Interest

Compound Interest

10
1.Present value (PV) - This is your current
starting amount. It is the money you have in your
hand at the present time, your initial investment
for your future.
2.Future value (FV) - This is your ending
amount at a point in time in the future. It should
be worth more than the present value, provided it
is earning interest and growing over time.
3.The number of periods (N) - This is the
timeline for your investment (or debts). It is
usually measured in years, but it could be any
scale of time such as quarterly, monthly, or even
daily.
4.Interest rate (I) - This is the growth rate of
your money over the lifetime of the investment.
11
5.Payment amount (PMT) - These are a series
of equal, evenly-spaced cash flows
Present value is the concept that states an amount of money today is worth more than that same
amount in the future. In other words, money received in the future is not worth as much as an
equal amount received today.

The Equation for Present Value

PV = FV / ( 1 + i )n

Where, FV = Future Value of the investment

i = interest rate per period
n = number of periods that the lump sum is invested
12
 PV = FV / ( 1 + i )n

Where, FV = Future Value of the investment

i = interest rate per period
n = number of periods that the lump sum is invested

What is the present value of P1,000 received in two years if the discounted
rate is 12% per year.

13
 PV = FV / ( 1 + i )n

Where, FV = Future Value of the investment

i = interest rate per period
n = number of periods that the lump sum is invested

You have just won a $1 million lottery. This new lottery, however, will pay
out the award 60 years from today. What is the present value of your award
based on a 16% p.a. interest rate?

14
 PV = FV / ( 1 + i )n

Where, FV = Future Value of the investment

i = interest rate per period
n = number of periods that the lump sum is invested

How much should you deposit now in order to receive P100,000 at the end of 5 years with 5%
compounded annual rate?

15
A dollar in hand today is worth more than a dollar to be received in the future
because if you had it now, you could invest it, earn interest, and own more than a
dollar in the future.

The Equation for Future Value

FV = PV x ( 1 + r )n n
FV = PV x ( 1 + r )
Where, FV = Future Value of the investment
Where, FV = Future Value of the investment
PV = Present Value of an investment (lump sum)
PV = Present Value of an investment (lump sum)
r = interest rate per period
r = interest rate per period
n = number of periods that the lump sum is invested 16
n = number of periods that the lump sum is invested
 FV = PV x ( 1 + r )n

Where, FV = Future Value of the investment

PV = Present Value of an investment (lump sum)
r = interest rate per period
n = number of periods that the lump sum is invested

A person who invests ₱100 today at 5% interest expects to receive ₱105 in one year, representing the ₱5
interest plus the return of ₱100 originally invested.

Future Value at end of the year 1 = ₱100 x (1 + 0.05) = ₱105

17
 FV = PV x ( 1 + r )n

Where, FV = Future Value of the investment

PV = Present Value of an investment (lump sum)
r = interest rate per period
n = number of periods that the lump sum is invested

The future value at the end of the second year is computed as follows:
Future value at the end of year 2 = ₱105 x ( 1 + 0.05 )^2 = ₱110.25

year 2 = ₱100 x ( 1 + 0.05 ) x ( 1 + 0.05 ) = ₱110.25

18
 FV = PV x ( 1 + r )n

Where, FV = Future Value of the investment

PV = Present Value of an investment (lump sum)
r = interest rate per period
n = number of periods that the lump sum is invested

You deposited P100,000 in time deposit. How much should you receive at the end of 5 years if it earns an
interest of 12% that is compounded annually?

19
 ORDINARY ANNUITY

It is a series of equal payments

made at the end of consecutive
periods over a fixed length of
time.

20
We have dealt with single payments, or “Lump Sums”. However, many assets provide a series of
cash inflows over time; and may obligation, such as auto, student, and mortgage loans, require a
series of payments.

When payments are equal and made and are made at fixed intervals, the series is an annuity.

Here’s a timelines for a $100 in each year for 3 year with 5% annuity.

21
 PV = FV / ( 1 + i )n

Where, FV = Future Value of the investment

i = interest rate per period
n = number of periods that the lump sum is invested

3.) How much should you deposit now in order to receive P20,000 at the end of each year for 5
years with 5% compounded annual rate?

22
3.) How much should you deposit now in order to receive P20,000 at the end of each year for 5
years with 5% compounded annual rate?

23
 FV = PV x ( 1 + r )n

Where, FV = Future Value of the investment

PV = Present Value of an investment (lump sum)
r = interest rate per period
n = number of periods that the lump sum is invested

You deposited P20,000 in time deposit at the end of each year for five years.
How much should you receive after you earned an interest of 12% compounded annually?

24
You deposited P20,000 in time deposit at the end of each year. How much should you receive after
5 years if it earns an interest of 12% compounded annually?

25
 Perpetuity in the financial system is a situation where a stream of cash flow payments continues
indefinitely or is an annuity that has no end. In valuation analysis, perpetuities are used to find the
present value of a company’s future projected cash flow stream and the company’s terminal value.
Essentially, a perpetuity is a series of cash flows that keep paying out forever.

26
You buy preferred stock in a company that pays you a fixed dividend of $2.50
each year the company is in business. If we assume that the company will go on
indefinitely, the preferred stock can be valued as a perpetuity. If the discount rate
on the preferred stock is 10%, the present value of the perpetuity is?

27
The definition of an annuity includes the words constant payment—in other words, annuities
involve payments that are equal in every period. Although many financial decisions involve
constant payments, many others involve uneven, or nonconstant, cash flows. For example, the
dividends on common stocks typically increase over time, and investments in capital equipment
almost always generate uneven cash flows.

There are two important classes of uneven cash flows:

1.a stream that consists of a series of annuity payments plus an additional final lump sum
2.all other uneven streams.

28
You invested $150 at the end of each year for three years, $250 at the end of year 4, $300
at the end of year 5, and $500 at the end of year 6.

If other investments of equal risk earn 11% annually, what is your PV ? And FV ?

29
You invested $150 at the end of each year for three years, $250 at the end of year 4, $300
at the end of year 5, and $500 at the end of year 6.

If other investments of equal risk earn 11% annually, what is your PV ? And FV ?

30
You invested $150 at the end of each year for three years, $250 at the end of year 4, $300
at the end of year 5, and $500 at the end of year 6.

If other investments of equal risk earn 11% annually, what is your PV ? And FV ?

31
THANK YOU!

32
33
34
35
• 7 – 10 Pages
• Name of members, Section, Group #, Title of Presentation
• Size 12, Times New Roman, Single Spacing
• Print Four Copies.
• 15 minutes presentation, 15 mins Q&A
• After the presentation, you may go! Score and feedback will
be given to your team leader after a day or two.

36
37
You invested $150 at the end of each year for three years, $250 at the end
of year 4, $300 at the end of year 5, and $500 at the end of year 6.

If other investments of equal risk earn 11% annually, what is your PV ? And
FV ?

-10PTS
1 – Timeline
6 – Present Value
1 – Final Answer PV
1 – Formula FV
1 – Final Answer FV
38