Department of Education

Bureau of Learning Delivery Teaching

and Learning Division

Business finance

Time Value of
Money
Quarter 1 Week 6 Module 6
Calculate future value and present value of money. (ABM_BF12-IIIg-h-18)

EXPECTATIONS

In This module, you will be able to:

⚫ calculate the future value and present value of
money.
⚫ compute loan amortization using
mathematical concepts and the present value
tables.
⚫ apply the mathematical concepts and tools in
computing for finance and investment
problems

Specifically, this module will help you to:

⚫ discuss future value of single amount.
⚫ describe future value of annuity.
⚫ differentiate present value of single amount and annuity.

PRETEST

I. Fill in the blanks.

Direction: Identify the following. Write your answer in the space provided
below.
Future Value
1. _________ is the accumulated value of the principal or present value
(PV) and all interest amounts of prior periods.
Annuity
2. _________refers to a series of consecutive equal investments or
payments made at an equal interval of time.
Simple Interest
3. _________means that the amount of interest is computed only once
during the term of the investment or borrowing regardless of whether the
term is less than one year, equal to one year, or more than one year.
Compound Interest
4. _________indicates that the interest of one compounding period is
added to the principal of the prior period to form the new principal as basis
for computing the interest of succeeding periods.
present valuesimply refers to the value of money at present.
5. The term _________
II. True or False.
Direction: Write True if the statement is correct. If it is not, write False.
________1. The one hundred pesos you are holding today has an equal worth
to the one hundred pesos you will be holding after a year.
________2. Time value of money analysis usually applies the concept of
simple interest.
________3. Simple interest computation indicates that interest is computed
once every year.
________4. Compounding interest entails that the interest is compounded
one every year.
________5. The compound amount of the investment refers to its present
value.

ABSTRACTION

Simple Interest means that the amount of interest is computed only once
during the term of the investment or borrowing regardless of whether the term
is less than one year, equal to one year, or more than one year.

Simple Interest Formula: I=P x R x T

where:
I - interest
P - Principal
R - Rate
T - Time
Compound Interest indicates that the interest of one compounding period
is added to the principal of the prior period to form principal of the prior period
to form the new principal as basis for computing the interest of succeeding
periods.

Future Value (FV), otherwise known as Compound Amount, is the principal

accumulated value of the principal or present value (PV) and all interest
amounts of prior periods.
Illustration 1:
Jenny has invested P10,000 on January 1, 2018 at 10% interest compounded
annually for five years.
Required: Compute the future value at the end of five years.

Periods
0 1 2 3 4 5

Present Value = 10,000 Future Value = ?

A step-by-step process to determine the future value of P10,000 at 10%

compounded annually for five years is as follows:
Year Principal at the Interest (P x R Future
Beginning of x T) Amount
the Period (a) (b) (a + b)
1 P10,000 P1,000 P11,000
2 11,000 1,100 12,100
3 12,100 1,210 13,310
4 13,310 1,331 14,641
5 14,641 1,464 16,105*
*Amounts are rounded off to the nearest peso to highlight the process.

As computed using the step-by-step approach, the future value amount of

P10,000 invested at 10% compounded annually is P16,105. The timeline
appears as follows:

Periods
0 1 2 3 4 5

10,000 11,000 12,100 13,310 14,641 FV= 16,105

Future Value Using the Formula

To facilitate easier computation of future value, the following formula has been
developed:

FV = PV(1 + I)n
 where: FV - Future Value
PV - Present Value
i - Periodic interest rate
n - Total number of compounding periods

Nominal rate is the rate of investment or borrowings. It is quoted as an

annual interest rate, unless otherwise specified.

Compounding period refers to the period of conversion made during the

year. It can be annual, semi-annual, quarterly, or monthly.

Frequency of conversion is the number of times the interest is added to the

principal during the year. If the compounding period is annual, the frequency
of conversion is 1; if semi-annual, the frequency is 2; if quarterly, it is 4; and if
monthly, it is 12.

Total compounding period (n) refers to the number of times an interest is

computed during the term of the investment. It is computed by multiplying the
frequency of conversion and the term of investment.

Periodic interest rate (i)refers to the interest rate per compounding period.
It is computed by dividing the nominal rate by the compounding period.

Applying the formula to our problem, the future value is computed as follows:

FV = PV (1 + i)n
= P10,000(1 + 0.10)5
= 10,000 (1.61051)
FV = P16,105 rounded off to the nearest peso.

Annuity refers to a series of consecutive equal investments or payments made

at an equal interval of time. In simple terms, an investment is considered in
annuity if:
1. There is a series of payments made;
2. The investments or payments are of equal amount; and
 3. The payments are made at an equal interval of time.

Illustration 2:

Angel invested P5,000 every end of the year at 10% interest compounded
annually for four years.

Required: Present the timeline of the investment.

Answer: The timeline of the P5,000 annual investment at 10% compounded

annually for four years appears as follows:

Periods

0 1 2 3 4

5,000(1.10)3 ?
1 -
?
5,000(1.10)2
2
5,000(1.10)1 ?
3

5,000
4

Generally, periodic investments or payments are made at the end of the

periodic interval. In the diagram, the first investment has been made at the end
of Year 1 which is also the beginning of Year 2. This kind of annuity is called
ordinary annuity.

On the other hand, when the periodic investments or payments are made at the
beginning of the periodic interval, the annuity is called annuity due.

Future Value of Annuity Using the Formula

The future value of an annuity is equal to the sum of the future amounts of
several investments or payments made from the first interval payment to the
LESSON PRESENT VALUE: SINGLE AMOUNT
3

end of the term.

Illustration 3:

End of period 1 P5,000 (1.10) 3 P6,655

End of period 2 5,000(1.10) 2 6,050
End of period 3 5,000(1.10) 1 5,500
End of period 4 5,000(x0.10)0 5,000
Future value P23,205

To facilitate a simpler computation, the following formula is used to determine

the future value of an annuity:

(1 + i)n − 1
FV = A
i
where:
FV - Future value of annuity
A - Annuity investment
i - Periodic interest rate
n - Total compounding periods

The formula to compute the future value of P5,000 invested every end of the
year for four years at 10% compounded interest appears as follows:
(1+𝑖)𝑛 −1
FV = A
𝑖
(1.10)4 −1
= P5,000
0.10
=P5,000(4.641)
FV = P23,205

Present Value refers to the value of the money at present. Hence, the P100
in your pocket today has a present value of P100. However, the amount of P100
10 years from now is not the same as P100 today. Its present value is definitely
lower.
This concept is illustrated in the timeline as follows:

Periods
0 1 2 n 10

1 P100

2 ? P100

Discounting refers to the process of determining the present value of a single

amount or series of cash flows.

Present Value using the Formula

PV = FV(1 + I)n

where:
PV - Present Value
FV - Future Value
i - Periodic interest rate
n - Total numbers of compounding periods

Illustration4:

Princess’s goal is to have an investment of P500,000 after four years. The

amount to be invested will earn interest of 12% compounded quarterly.

Required: Determine the amount of to be invested by Princess at 12% interest

compounded quarterly.

Answer: The problem is simply asking for the present value or discounted
value of P500,000 which has been invested at 12% compounded quarterly for
four years.

In this case, the future value is P500,000. The nominal interest rate is 12%
compounded quarterly; hence, the periodic interest 3% (12% ÷4). Since the
LESSON PRESENT VALUE: ANNUITY
4

term is four years and the frequency of conversion is quarterly, then the total
compounding periods is 16.

PV = FV(1+i)-n
= P500,000 x (1.03)-16
= P500,000 x 0.6232
PV = P311,600

Based on the computation, Princess needs to invest P311,600 at 12% interest

compounded quarterly in order to have an investment of P500,000 at the end
of four years.

The timeline appears as follows:

Periods
0 1 2 3 4

PV P311,600 P500,000 FV

The present value of annuity refers to the present value of all individual
investments or deposits made. Each individual investment is discounted and
then all the discounted amounts are added to represent the present value of
annuity.
This concept is illustrated in the timeline assuming that the annuity is P10,000
at 10% interest compounded annually for four years:

Periods
0 1 2 3 4

1 ? P10,000

P10,000
2 ?

3 P10,000
?
P10,000
4 ?
_____
?
PV _____

Using the step-by-step approach, the present value of the P10,000 annuity for
four years compounded at 10% annually appears as follows:

Period 1 P10,000 x (1.10)-1 or P10,000 x 0.9091 P9,091

2 10,000 x (1.10)-2 or 10,000 x 0.8264 8,264
3 10,000 x (1.10)-3 or 10,000 x 0.7513 7,513
4 10,000 x (1.10)-4 or 10,000 x 0.6830 6,830
Present value of P10,000 annuity P31,698

Present Value of Annuity using the Formula

The step-by-step process appears to be tedious which may lead to the

possibility of committing mechanical errors in the computation. Thus, the
following formula has been devised to determine the present value of the
annuity:

1 − (1 + i)−n
PV = A
i
 where:
PV - Present value of annuity
A - Annuity
i - Periodic interest rate
n - Total compounding periods

Illustration 5:

Izzy plans to invest P3,000 at the end of every quarter for 8 years at the interest
rate of 10% compounded quarterly.

Required: Determine the present value of the quarterly annuity of P3,000 for
eight years.

Answer: The periodic interest rate is 2.5% (10% ÷ 4), and total compounding
period is 32 (8 years x 4). Since Izzy will make an investment of P3,000 every
end of the quarter, the total investment of Izzy for 32 quarters will be P96,000
(P3,000 x 32).

Applying the formula, the present value of P3,000 quarterly annuity for eight
years at the interest rate of 10% compounded quarterly is computed as follows:
1−(1+𝑖)−𝑛
PV = A
𝑖
1−(1.025)−32
= P3,000
0.025
= P3,000(21.848)
PV = P65,5444

The present value of the P3,000 annuity at the end of every quarter for 32
quarters at the interest rate of 10% compounded quarterly is P65,544, though
the total investment amounts to P96,000 (P3,000 x 32 quarters).

The timeline may appear as follows:

Periods
0 Qrt. 1 Qrt. 2 Qrt. n Qrt. 32

PV P65,544 P3,000 P3,000 P3,000 P3,000

The diagram shows that the annuity of P3,000 at the end of every quarter is discounted
to determine the present value.

ACTIVITY

Directions: Discuss briefly the following terms. Write your answer on the
space provided for each item.

a. Future value of a single amount

b. Future value of annuity

c. Present value

D. Discounting

E. Compounding period

REMEMBER

Simple Interest is the amount of interest is computed only once during the
term of investment or borrowing regardless of whether the term is less than
one year, equal to one year, or more than one year.

Compound Interest is the interest of one compounding period is added to

the principal of the period to form the new principal as basis for computing the
interest of succeeding periods.

Future value (FV) is the accumulated value of the principal or present value
(PV) and all interest amounts of prior periods.

Nominal rate is the rate of investment or borrowings.

Compounding period refers to the period of conversion made during the

year.

Frequency of conversion is the number of times the interest is added to the

principal during the year.

Total compounding period (n) refers to the number of times an interest is

computed during the term of investment.

Periodic interest rate (i) refers to the interest rate per compounding
period.

Annuity refers to a series of consecutive equal investments or payments made

at an equal interval of time.

Present Value (PV) refers to the value of the money at present.

Discounting refers to the process of determining the present value of a single

amount or series of cash flows.

Present value of annuity refers to the present value of all individual

investments or deposits made.

CHECK YOUR UNDERSTANDING

Directions: Analyze and answer the following questions.

1. Jenny’s father has offered her two proposals as follows:

Proposal 1: Receive P40,000 in 25 years.
Proposal 2: Receive P3,800 today instead of receiving P40,000 in 25 years.
The money is discounted at 10% annually.

Required: Determine which proposal Jenny should accept.

2. Angel has invested in Commercial Bank Y a single amount of P300,000 at

9% interest compounded quarterly for 12 years. At the end of 12 years, Angel
has withdrwan the proceeds of her investment and invested them in
Commercial Bank B at 8% interest compounded semi-annually for another 10
years.

Required: Determine the value of investment at the end of 10 years.

 POST TEST

I. Multiple Choice.

Directions: Choose the letter corresponding to the correct answer for each of
the questions provided below.

1. Ryan invested P2,000 for 8 years at the interest rate of 10% compounded
quarterly. Determine the present value of the quarterly annuity of P2,000 for
eight years.

a. P65,544 c. P43,696
b. P54,620 d. P32,772

2. Mariveth plans to accumulate P1,000,000 at the end of eight years in which

the money earns an interest of 9% compounded quarterly. Determine the
amount to be invested by Mariveth at an interest of 9% compounded quarterly.

a. P490,700 c. P588,840
b. P539,770 d. P441,630

3. Love Joy invested P10,000 every end of the year at 10% interest
compounded annually for 5 years. Determine the future value of annuity.

a. P30,525.50 c. P54,9459
b. P48,840.80 d. P61,051

4. Leonilyn wants to invest her P100,000 at 6% simple interest for a period of

three years. Compute the simple interest.

a. P18,000 c. P30,000
b. P24,000 d. P12,000

5. Chiara invested most of her savings of P300,000 at 8% interest compounded

quarterly for the period of 5 years. Compute the amount of the investment at
the end of the fifth year.

a. P297,180 c. P594,360
b. P445,770 d. P148,590
6.You deposit PHP1,000 in your bank account. If the bank pays 4% simple
interest, how much interest will you accumulate in your account after 10 years?
What if the bank pays compound interest?

Answer Key Simple Interest = 1000 x .04 x 10 = 400 Compound Interest =

1000 x (1.0410) – 1000 = 480.24

7. Mario will be making a lump sum payment of PHP1.6 million on the

condominium he is buying two years from now. If he wants to set aside funds
from now and invest it that will earn interest of 3%, net of taxes every year and
this amount is compounded annually, how much does he need to invest today?
What if the interest is compounded semi-annually, how much does he need to
invest today?
Answer Key • PHP1,600,000/(1.03)2 = 1,508,153.45 •
PHP1,600,000/(1.015)4 = 1,507,494.77

REFERENCE:

NICK L. ADUANA, C AND E PUBLISHING

GOOGLE NET.COM
DEPED LDRMS

PREPARED BY:
LETESSIE A. DIANO
ABM TEACHER
MANDAUE CITY COMPREHENSIVE NHS