10/10/2019 Review of the Time Value of Money Solving for Future Value of a Lump Sum Method 1: FORMULA Method FV=PV x (1+r)" Method 3: SPREADSHEET Method =FV(rate,nper,pmt,pv,type) Method 4: Time Value Table Method FV=PV x FVIF 5: 1% torn pas Solving for Future Value of a Lump Sum Example Let’s say you want to know how much money you will have accumulated in your bank account after 4 years, if you deposit all 5,000 of your high-school graduation gifts into an account that pays a fixed interest rate of 5% per year. You leave the money untouched for all four of your college years. T) Solving for Future Value of a Lump Sum Method 1 Formula Method FV=PVx (1 +r)" ‘Substituting the ven values FV=P5,000 x (1 + 5%)* FV=P5,000 x (1.05)4 FV=PS5,000 x (1.21550625) FV=P6,077.53 Solving for Future Value of a Lump Sum Method 3 Spreadsheet Method =FV(rate,nper,pmt,pv,type) Using Excel, key inthe t: V(5%,4,0,-5000,0) then press enter 6,077.53. 7) Solving for Future Value of a Lump Sum. Method 4 Time Value Table Method FV = PV X FVIFic596 for pds Using the Future Value Interest Factor (FVIF) table, find the FACTOR at the intersection of 5% and 4 periods. FV=P5,000 x (1.2155) FV=P6,077.50F) Solving for Present Value of a Lump Sum Method 1: FORMULA Method PV=FV x [1/(4+r)"] Method 3: SPREADSHEET Method =PV(rate,nper,pmt,fv,type) Method 2: Time Value Table Method PV=FV x PVIF, ‘at r% for n pds Solving for Present Value of a Lump Sum Example Your retirement goal is P2,000,000. BDO is offering you a certificate of deposit that is good for forty years at 6%. What initial deposit do you need to make today to reach your P2,000,000 goal at the end of forty years? 4, Solving for Present Value of a Lump Sum Method 1 Formula Method PV=FV x [1/(14r)"] Substituting the given values PV=P2,000,000 x [1/(1+6%)*°] PV=P2,000,000 x [1/(1.06)*°] PV=P2,000,000 x (0.0972) PV=P194,444.38 Solving for Future Value of a Lump Sum Method 3 Spreadsheet Method =PV(rate,nper,pmt,fv,type) Using Excel, key inthe 'V(6%,40,0,-2000000,0) 194,444.38 7) Solving for Present Value of a Lump Sum Method 4 Time Value Table Method PVEFV X PVIF 9:65 for 40 pas Using the Present Value Interest Factor (PVIF) table, find the FACTOR at the intersection of 6% and 40 periods. PV=P2,000,000 x (0.0972) PV=P194,444.38 The Time Value of Money (Part 2)Learning Objectives 1. Compute the future value of multiple cash flows, 2, Determine the future value of an annuity. 3. Determine the present value of an annuity. 4. Adjust the annuity equation for present value and future value for an annuity due and understand the concept of a perpetuity. 5, Distinguish between the different types of loan repayments: discount loans, interest- only loans and amortized loans. 6. Build and analyze amortization schedules. Future Value of Multiple Payment Streams * With unequal periodic cash flows, treat each of the cash flows as a lump sum and calculate its future value over the relevant number of periods. *Sum up the individual future values to get the future value of the multiple payment streams. KA The time line of a nest egg Future Value of Multiple Payment Streams (continued) Example 1: Future Value of an Uneven Cash Flow Stream: Jim deposits P3,000 today into an account that pays 10% per year, and follows it up with 3 more deposits at the end of each of the next three years. Each subsequent deposit is P2,000 higher than the previous one. How much money will Jim have accumulated in his account by the end of three years? Future Value of Multiple Payment Streams (Example 1 Answer) FV = Px (14ry" 3000 (1.10) = P3600 1.331 2992.00 500 (410) = p,000 x 1210 =P 250.00 009 (3.30) = 7,900 1.100 = F7700.00 000 (110) = 9,000 1000 = P9000.00 Future Value of an Annuity “Annuities are equal, _ periodic outflows/inflows., e.g. rent, lease, mortgage, car loan, and retirement annuity payments. *An annuity stream can begin at the start of each period (annuity due) as is true of rent and insurance payments or at the end of each period, (ordinary annuity) as in the case of mortgage and loan payments.10/10/2019 Future Value of an Annuity The formula for calculating the future value of an annuity stream is as follows FV=PMT x aa where PMT is the term used for the equal periodic cash flow, r is the rate of interest, and n is the number of periods involved. Future Value of an Annuity Other methods of computing for the future value of an annuity FVIFA Table Method: FV=PMT x FVIFAg¢ 59% for n pds SPREADSHEET Method: =FV(rate,nper,pmt,pv,type) Future Value of an Annuity Example 2: Future Value of an Ordinary Anni Stream Jill has been faithfully depositing P2,000 at the end of each year since the past 10 years into an account that pays 8% per year. How much money will she have accumulated in the account? Future Value of an Annuity Example 2_ Answer LONG METHOD. P3998.01 Future Vu of Payment One = 72,000 1.0 ture Vie of Payment Tres = 2,000 2 Future ale of Payment Four = P2,000 1088 ~ Future Vale of Payment Seven = £2000 1.08" = P2519.42 Foti Val of Payment ght ~ 2,000 182 = P2.332.80 Future Valin of Payment ne = P2000 1.084 = p2.160.00 cue Valeo Payment Tn =P2,000% 1.08" = P.000 00 ‘otal ale of acount ate endo 20 years P2BS73.13 Future Value of an Annuity Example 2 (Answer) FORMULA METHOD FvepMr x tO? = 1 ‘Substituting the given values: a (1 + 8%)10- 1 FV=2,000 x sae FV=P28,973.13 Future Value of an Annuity Example 2 (Answer) FVIFA TABLE METHOD FV=PMT X FVIFAs: 6% for 10 pds where PuIT=F2,000; and using the FVIFA table, find the factor at the intersection of 8% and 10 periods FV=P2,000*14.486562 FV=P28,973.13TO/M0/2019 ly Future Value of an Annuity USING A SPREADSHEET Syntax is =FV(rate,nper,pmt,pv,type) Using your favorite spreadsheet solution, enter the f: =FV(.08,10,-2000,0,0) Then press the enter key, the output is P28,973.13 Type is 0 for ordinary annuities and 1 for annuities due Present Value of an Annuity To calculate the value of a series of equal Periodic cash flows at the current point in time, we can use the following simplified formula: PV 7 |S@ Present Value of an Annuity Other methods of computing for the Present value of an annuity: PVIFA Table Method: PV=PMT x PVIFAs¢ 536 for n pds SPREADSHEET Method: =PV(rate,nper,pmt,fv,type) Time line of present value of annuity stream. ww Present Value of an Annuity Example 3: Present Value of an Annuity. John wants to make sure that he has saved up fenough money prior to the year In which his daughter begins college. Based on current estimates, he figures that college expenses. will ‘amount to P40,000 per year for 4 years (ignoring any inflation or tuition’ increases during. the 4 years of college). How much money wll John eed to have accumulated in an account that earns 7% per year, just prior to the year that his daughter starts college? Present Value of an Annuity Example 3 Answer FORMULA METHOD. 1 1 nena le] ‘Substituting the given values: PV=P40,000 x 3.387211 PV=P135,488.45 ssis Present Value of an Annuity Example 3 Answer PVIFA TABLE METHOD PV=PMT x PVIFA, Lat 7% for 4 pds where, PMT=P40,000; and using the PVIFA table, find the factor at the intersection of 796 and 4 periods PV=P40,000 x 3.3872 PV=P135,488 ES a ee Present Value of an Annuity USING AN EXCEL SPREADSHEET Syntax is =PV(rate,nper,pmt,fv,type) Using your favorite spreadsheet solution, enter the ff =PV(7%,4,-40000,0,0) ‘Then press the enter key, the output is P135,488.45 led Annuity Due A cash flow stream such as rent, lease, and insurance payments, which involves equal periodic ash flows that begin right away or at the beginning of each time interval is known as an annuity due. ‘An ordinary annuity versus an annuity due. rT Ty ee ah ah » 1 S100 $100. $100 $100 Oatinary annuity 100 $100—$100 Ansty Annuity Due vs. Ordinary Annuity Example 4: Let's say that you are saving up for retirement and decide to deposit P3,000 each year for the next 20 years into an account which pays a rate of interest of 8% per year. By how much will your accumulated nest egg vary if you make each of the 20 deposits at the beginning of the year, starting right away, rather than at the end of each of the next ‘twenty years? Annuity Due vs. Ordinary Annuity Example 4 Answer (for Ordinary Annuity) FV,=PMT xGtoron Substituting the given values: z, (4 + 8%)?0~4 FV,=3,000 aa FV,=P137,285.89 Annuity Due vs. Ordinary Annuity Example 4 Answer (for Annuity Due) FVg=FV, x (1 + r) Substituting the given values: FV4=137,285.89 x (1 + 8%) FV=P148,268.76NOIVUOEO TS |S Three Loan Payment Methods Loan payments of 3 ways 1) Discount loan * Principal and intere end can be structured in one st Is paid In lump sum at 2) Interest-only loan * Periodic interest-only at end, 3) Amortized loan * Equal periodic payments of principal and interest. eae ty payments, principal due 7 [gd Three Loan Payment Methods Example 5 "YOU want to borrow P40,000 for a period ofS years. The lenders offer YOU a choice of three payment strvtures 1: Pay al ofthe interest (10% per year) and principal in ane lump sum atthe end of 5 years, 2, Pay intrest atthe rate of 10% per year for 4 years and then 2 final payment of interest and principal at the end 3. Pay’ equal payments atthe end of each yeer inclusive of terest and part ofthe principal. Under which of the three options will YOU pay the least Interest and ‘wt? Caleuate the total amount. of the ayments and the amount of Interest pald under each ternative 7] Three Loan Payment Methods Option scount Loan. Since all the interest and the principal is paid at the end of 5 years, you must use the FV of @ lump sum equation to calculate the payment requlred FVSPVx (1 +r)" A i Three Loan Payment Methods Option 2: Interest-Only Loan. Annual Interest Payment (Years 1-4) 10,000 x 0.10 +=P4,000 (P26,000 for 4 yrs) Year 5 payment ‘Annual interest payment + Principal payment =P4,000 + P40,000 = 44,000 ‘Total payment = P16,000 + P44,000 = P60,000 Interest paid = P20,000 ete ETE lg Three Loan Payment Methods Option 3: Amortized Loan. Given the following: n=5; r=10%; PV=P40,000; 0 Compute for the PMT (or the annual payment) using the PVIFA Table Method: PV=PMT x PVIFAy¢ 10% tor 5 pds P40,000=PMT x 3.7908 PMT=P10,551.86 ig Three Loan Payment Methods Option 3: Amortized Loan. Given the followin« n=5; r=10%} PV=P40,000; FV=0 Compute for the PMT (or the annual payment) using Excel: ‘=PMT(rate,nper pv,fv, type) =PMT(.1,5,-40000,0,0) =P10,551.90otal Payments ~ Lo, an Amoun 52,759.31 - pap,ogg Unt =P12,759,31 10/10/2019 Three Loan Payment Methods loan Tyce Total Payments Interest Baia Discount Loan 64,420.40 24,420.40, Tnterest-onlyLoanP60,000.00 20,000.00, Amortized Loan 52,759.31 12,759.31 Amortization Schedules Tabular listing of the allocation of each Ioan payment {owards interest and principal reduction Helps borrowers and lenders gure out the poy balance ‘on an outstanding oan, Procedure: 4, Compute tne amount ot each equal periodic payment (oun, 2, Galculate Interest on unpaid balance at the end of teach period, minus it from the PMT, reduce the loan Balance by the remaining amount. 3. Continue the process for each payment period, until we (get a Zero loan Balance. Example 6: Loan amortization schedule. Prepare a loan amortization schedule for the amortized loan option given in Example 5 above. What is the loan payoft amount at the end of 2 years? Given the following 'n=5; r=10%; PV=P40,000; FV=0 ‘We computed Por 0,551.89 Loan Amortization Schedule eo: Bal Payment Interest Prlacps! End al 4 40,000.00 10,551.89 4000.00 6551.99 33,448.11 2 3344081 1055189 334481 7320708 26,241.02 3 2624103 10,551.89 226810 792779 1991224 4 1921328 1055199 1931.32 972057 9.59267 5 9359267 1055189 959.27 989267 0 an payoff amount at the end of 2 fs P26,241.09 Problems and LrercivesProblems and Exercises 1 * YOU wish to earning 6% invest the m: your account: 00 nto compoundeg?® Nt an account ‘oney today, how Tf you me ta how much wil pee * Explain your answer tono2019 Solution 1 FV=PVx(1 +R)" FV = P8,000 (1 + 6%)6 FV = P11,348.15 Interest earned = p3,348.15 FV=PVx(1 +R)" FV = P8,000 (1 + 6%)3 FV = 9,528.13, Interest earned = 1,528.13, Problems and Exercises 2 + YOU made your first P3,000 deposit today into a retirement fund earning an average annual rate of 6%. How long will it take your deposit to reach a value of P50,0007 ‘= How long will it take if instead you invest, the money into an account earning 10% per year? + After making your calculations, how does this information affect your decision-making regarding long-term investments? Solution Using any spreadsheet solution At 6% At 10% Rate 0.08 0.10 Pmt ° 0 Pv (3,000) (3,000) Fv 50,000 50,000 Type ° ° Nper 48.28 yrs 29.52 yrs 4 Problems and Exercises 3 = YOUR parents offered you today a P10,000 high schoo! graduation gift with an option for another P20,000 upon graduation from college in four years. Your friends tell you this is a P30,000 gift from your parents, but you already know something about the time Yalue of money. If the expected inflation rate over the next four years Is expected to be 4% per year, what do you think the gift is worth in today’s peso? How should you ‘explain this to your friends? Solution You must calculate the PV of the gifts The PV of the P10,000 is P10,000 The PV of the P20,000 to be received after 4 years is PV=FVx[1/(1+)"] PV = P20,000 x [ 1/ (1 + 4%)4) PV = P17,096.08 Total PV = P27,096.08fewer + Tf you had the money now Opportunity to invest it, so value would exceed P20/000, ‘You would have the ‘that in four years the Problems and Exercises 4 * You visited Motor Image sho forte 2 Subaru Forester. You were satisfied mre Prgeatures and decided to get'one amounting P1.868M, * You do not have enough money to buy the forester. So you opted to finance the vehicle ths PT Auto Loan, * After the usual credit and background investigation, ‘your loan application was approved at the rate of 1.5% per month for 5 years * How much is your monthly loan amortization? Solution Using Excel spreadsheet: =PMT(rate,nper,pv,fv,type) =PM1(.015,60,-1868000,0,0) =P47,434.92