Business SENIOR

HIGH
Finance SCHOOL

Self-Learning
Module
Time Value of Money
14
Quarter 3
Business Finance - 12
Quarter 3 – Module 14: Time Value of Money
First Edition, 2020

Republic Act 8293, Section 176 states that no copyright shall subsist in any
work of the Government of the Philippines. However, prior approval of the
government agency or office wherein the work is created shall be necessary for
exploitation of such work for profit. Such agency or office may, among other things,
impose as a condition the payment of royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand

names, trademarks, etc.) included in this module are owned by their respective
copyright holders. Every effort has been exerted to locate and seek permission to use
these materials from their respective copyright owners. The publisher and authors
do not represent nor claim ownership over them.

Published by the Department of Education - Schools Division of Pasig City

Development Team of the Self-Learning Module

Writer: Wilma G. Ostan
Editor (Content/Language): Dennis T. Alex / Edna D. Camarao
Reviewer: Edna D. Camarao and Dennis T. Alex
Illustrator:
Layout Artist:
Management Team: Ma. Evalou Concepcion A. Agustin
OIC-Schools Division Superintendent
Carolina T. Rivera, Ed. D.
OIC-Assistant Schools Division Superintendent
Victor M. Javena, Ed. D.
Chief - School Governance and Operations Division
Manuel A. Laguerta, Ed. D.
Chief- Curriculum Implementation Division

Education Program Supervisors

Librada L. Agon EdD (EPP/TLE/TVL/TVE)

Liza A. Alvarez (Science/STEM/SSP)
Bernard R. Balitao (AP/HUMSS)
Joselito E. Calios (English/SPFL/GAS)
Norlyn D. Conde EdD (MAPEH/SPA/SPS/HOPE/A&D/Sports)
Wilma Q. Del Rosario (LRMS/ADM)
Ma. Teresita E. Herrera EdD (Filipino/GAS/Piling Larang)
Perlita M. Ignacio PhD (EsP)
Dulce O. Santos PhD (Kindergarten/MTB-MLE)
Teresita P. Tagulao EdD (Mathematics/ABM)

Printed in the Philippines by Department of Education – Schools Division of

Pasig City
Business SENIOR
HIGH

Finance SCHOOL

Self-Learning
Module

14
Quarter 3

Time Value of Money

Introductory Message

For the Facilitator:

Welcome to the Business Finance Self-Learning Module on Time Value of

Money!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
 For the Learner:

Welcome to the Business Finance Self-Learning Module on Time Value of

Money!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectation - This points to the set of knowledge and skills that

you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATION

At the end of the lesson, you are expected to identify the time value of
money.

PRETEST

MATCHING TYPE. Choose the letter that best corresponds to the item below.

_________ 1. 1-(1+i)-n A. Present value factor of annuity due

i
_________ 2. 1_ B. Simple interest rates
i
_________ 3. (1 + i) n C. Present value factor of perpetuity

_________ 4. 1-(1+i)-n x (1 + i) D. Future value factor of lump-sum

i
_________ 5. PxRxT E. Present value factor of ordinary annuity

RECAP

We have learned, to distinguish the simple interest rates to compound

interest rates and solved exercises from those types of interest.

LESSON

TIME VALUE OF MONEY

If you ask your parents or even your grandparents, the price of candy in the
past, you might be surprised that things were so cheap in the past. The time value
of money would tell us that a peso today is not equal to a peso in the future. Many
things contribute to the change in the time value of money such as opportunity cost
as well as inflation.
Value of money, at present and in the future, can be influenced by some
economic factors including inflation, cost of goods, or buying power of peso. It may
capture concepts such as the money we have now, at present, or can be invested,
which can yield a higher amount in the future. Investment can either be in the form
of productive assets such as equipment or it can be placed in an interest-bearing
investment such as savings.
Finance managers are tasked with mentally moving money between the
present and the future. Money that the firm has today should not be left idle or it
will lose real value. It should be put to work earning interest or creating income for
the firm. Companies should plan for future investment and expenditures.
This section shall be divided into the following parts:
A. Lump-sum payment
B. Annuities
• Ordinary annuity
• Annuity due
C. Perpetuity

A. Lump-Sum Payment
To account for time value for a single lump-sum payment, we use the same
formula provided for under compound interest rates as shown below:

FV = PV x (1 + i )n
Where:
FV = future value
PV = present value
i = effective interest rate per period
n = number of times periods
(1+i)n = future value factor

On the other hand, i is the effective interest rate that would take into account all
associated costs of holding money (e.g. opportunity cost and inflation). The given
formula can also be manipulated for us to compute the present value as shown
below:
PV = FV x (1 + i )-n
Where:
FV = future value
PV = present value
i = effective interest rate per period
n = number of times periods
(1+i)-n = present value factor
Example:
Assume that you told the banker that you need not obtain the loan now and
will instead buy the equipment from the supplier under deferred payment terms. The
terms provided to you by the supplier is to pay the ₱150,000 by issuing a non-
interest-bearing note. A non-interest-bearing note is a note payable that does not
require payment of interest. A similar note payable under normal conditions with the
bank would yield a rate of 10% (effective rate). First, let us compute the present value
of the note with a future value of ₱150,000, an effective rate of 10% and a term of 3
years as shown below:
PV = FV x (1 + i )-n
PV = 150,000 x (1 + 0.10)-3
PV = 150,000 x 0.7513 (rounded)
PV = 112,695 (rounded)

We assume that the ₱150,000 already includes interest payment. We can view the
present value of the loan as the actual principal of the loan with a 10% compound
interest rate. See below the present value factor.
Year Unpaid Balance Interest for the year Unpaid Balance
Beginning Ending
O (start of the 112,695
loan)
1 75,130 112,695 x 10% = 11,270 123,965
2 82,643 123,965 x 10% = 12,397 136,362
3 (end of loan) 90,907 136,362 x 10% = 13,636 149,998
❖ Please note that all values in the table above are rounded off to the nearest
peso. You could see that the unpaid balance at the end of the third year is
approximately ₱150,000. The difference of ₱2 is due to rounding off of the
present value factor as well as interest.

B. Annuities
This is a series of cash flows of equal amount, equally spaced in time.
Annuities are commonly involved in pensions and many types of personal loans, as
well as in some commercial loans and financial instruments, such as bonds.
Example. The supplier offered you an alternative payment scheme. Let us assume
that the supplier allowed you to pay the equipment under installment basis of
₱50,000 annually. This payment scheme would illustrate an annuity wherein equal
cash flows are to be made every period. The timing of the payment would dictate
whether the scheme is that of an ordinary annuity or an annuity due.
• Ordinary Annuity – the cash flows (installment payments) would always
occur at the end of each period. Therefore, under an ordinary annuity, you are
required to make yearly payments of ₱50,000 to the supplier at the end of
each period for three years.

PV of Annuity = Annual payment x 1 – (1 + i)

-n

i
By substituting the details found in our computation earlier, we get the
present value as follows:
PV of Annuity = 50,000 x 1 – (1 + 0.10)
-3

0.10
PV = 50,000 x 2.4869 (see table below)
PV = 124,345

http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG

❖ It can be seen that it would be more costly for us to pay on installment because
the present value computed for an ordinary annuity of ₱124,345 is higher
than the present value under lump-sum payment of ₱112,695. Again, we can
assume that the interest is already imputed in the payment and that we
obtained a loan of ₱124,345 payable in 3 equal annual installments of ₱50,000
each. This is proved by the table below:
 Year Unpaid Interest for the year Principal Unpaid
Balance Payment Balance
Beginning Ending
O (start of
124,345
the loan)
124,345 x 10% =
1 124,345 50,000 86,780
12,435
123,965 x 10% =
2 86,780 50,000 45,458
12,397
3 (end of 136,362 x 10% =
45,458 50,000 -4
loan) 13,636

❖ Again, the unpaid balance at the end of the third year of ₱4 is due to rounding
off. We can see that the unpaid balance at the end of the term of the note
approximates zero. This means that once we pay ₱50,000 per year for three
years, we would already fully pay the ₱150,000 equipment.

To compute for the future value of annuity based on the details of our loan
with the supplier:
FV of annuity = Annual Payment x 1 – (1 + i)
-n

Let’s apply the formula for the future value of annuity based on details of our
loan with the supplier:
(1 + 1.10)3 - 1
FV of annuity = 50,000 x
0.10

FV = 50,000 x 3.3100
FV = 165,500
 • Annuity Due – the timing of the installments would occur at the end of each
period. If the payments are to be made at the beginning of each period. The
formulas for the annual payments and present value are shown below:

[
PV of annuity = Annual Payment x 1 – (1 + i) x (1+ i)
i
-n
]

[
FV of annuity = Annual Payment x 1 – (1 + i)
n-1
x (1+i) ]
i
Take note that the formula provided above is similar to the formulas for
ordinary annuity except for the addition of a multiplier for the factor (1+i).
In our earlier example, if the supplier would allow us to pay ₱50,000 annually
for three years with the first payment due immediately, how much would be the
present value and the future value of our payments? Let us apply the formulas and
find out!
[
PV of annuity = 50,000 x 1 – (1 + 0.10) x (1+ 0.10)
0.10
-3
]
PV of annuity due = 50,000 x 2.7355 (rounded)
PV of annuity due = 136,775 (rounded)

❖ Again, note that the present value factor of an annuity due for three years at
a rate of 10% is 2.7355. See below PV of annuity due table. Summarizing the
interest as well as cash flows:
Year Unpaid Interest for the year Principal Unpaid
Balance Payment Balance
Beginning Ending
O (start of
136,775 -50,000 136,775
the loan)
86,775 x 10% =
1 86,775 -50,000 45,453
8,678
45,453 x 10% =
2 45,453 -50,000 -2
4,545
3 (end of
-2 -2
loan)

❖ Please take note that the ₱2 difference is again due to rounding off of the
present value factor and the interest. Notice that by the end of the 2 nd year,
you have already fully paid the purchase price of the equipment. This is
because you are paying the ₱50,000 in advance under terms of an annuity
due as compared to the ordinary annuity.
❖ For the future value of annuity due factor is 3.6410 and that we paid an
equivalent of ₱182,050 at the end of the 3rd year over the three year terms of
the loan.
C. Perpetuity
It is more likely considered a form of an annuity. Yet, the two differs from the
mode of payment since payment in perpetuity are considered continuous forever.
We cannot get the future value of perpetuity payments, simply because the
answer would be “Infinite”. But we can get the present value of a string of perpetuity
payments.
Example:
Let’s assume that you would continue to pay ₱12,000 annually to the supplier
indefinitely in exchange for the equipment and that the effective rate is 10%. How
would we now determine the present value of those payments? To illustrate this, we
first use the present value factor formula for an ordinary annuity:

PVFA = 1 – (1 + i)
-n

i
Next, if we try computing the present value factor of an ordinary annuity with
an extremely large n, we would see that (1 + i) -n would then be an extremely small
number. Therefore, as n approaches ∞, (1 + i)-n would then become smaller and
smaller until it becomes immaterial (assumed zero) in out computation. Therefore,
to compute the present value of a perpetuity, the formula would then be:

PV = Annual Payments x 1
i
The reason for the formula above is that we assume that (1+i)-n is equal to
zero for perpetuity. Thus, we are left with 1 divided by i as our present value factor
of perpetuity. Now, let us compute the present value assuming that you would be
paying ₱12,000 annually indefinitely at an effective rate of 10%.
 PV = 12,000 x 1_
0.10
PV = 120,000

❖ The present value of all our payments to the supplier of ₱12,000

indefinitely is ₱120,000. We can simply interpret this as obtaining a
loan of ₱120,000 with an indefinite term at an interest rate of 10% to
purchase the piece of equipment.

ACTIVITIES

Problem Solving. Analyze and show your computation in a sheet of paper.

Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option
of paying it today for PHP10,500 or buying them in installment where he has to pay
a down payment of PHP4,000 today, and the balance will be paid in two equal
payments of PHP4,000 each for the next two years. Given an interest rate of 10%,
which is the better option? Explain?

WRAP-UP

• Explain the concept of the time value of money.

• Discuss the concept of perpetuity.
• What is the difference between an ordinary annuity and an
annuity due?

VALUING

• What do you think the importance of the time value of money?

• Why there’s a need to know the formulas of the time value of money?
• How would you compare the present and future value of an ordinary
annuity?
 POSTTEST

DIRECTIONS. Read the questions and encircle your answer.

1. JC intends to save a small portion of his salary in a bank account every year for
3 years. The yearly amount of ₱10,000 will be deposited at a bank that gives
interest at 10% every year. What will be the first payment to be made at the start
of the first year, compute for the future value of annuity due?
A. 33,100.00 B. 36,410.00
C. 27,355.37 D. 24,868.51

2. Mr. Mendoza wishes to determine how much the value of his savings in 5 years
will be if he will put ₱1,000 per year in a bank which provides a 7% interest per
annum.
A. 6,500.00 B. 7,000.00
C. 4,750.00 D. 5,750.70

3. What is the present value of a 6% investment that would pay ₱30,000 annually
perpetually?
A. 500,000 B. 300,000
C. 450,000 D. none of the above

4. Mario will be making a lump-sum payment of ₱1.6 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 semi-annually, how much does he need to invest today?
A. 1,508,153.45 B. 1,600,000.00
C. 1,507,494.77 D. 1,509,155.43

5. Mario will be making a lump-sum payment of ₱1.6 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?
A. 1,508,153.45 B. 1,600,000.00
C. 1,507,494.77 D. 1,509,155.43
 KEY TO CORRECTION

shoes today.
Yusoph should buy the pair of
would be more expensive, Mr.
Since buying on instalment
factor because it is paid today.
not multiplied by the annuity
The 4,000 down payment is
PHP10,500 for buying today. A 5.
5. B C 4.
buying on instalment vs. PV
4. A A 3.
3. D rate=10%) = PHP10,932.00 for
D 2.
2. C factor: 1.7355 period=2,
B 1.
1. E PV = 4,000 + 4000 x (PVA
Pretest Activity PostTest

REFERENCES

Alminar-Mutya, Ruby F. (2018). Business Finance: A Management Approach.

Mandaluyong City, Philippines: Anvil Publishing, Inc.
Domingo, James Cristopher D. (2013). Business Finance. Manila, Philippines: GIC
Enterprise & Co. Inc.
Tugaz, Florenz C.; Dela Cruz, Aeson Luiz C.; Paril, Joshua S.; and Tang, Alger C.
(2017). Business Finance. Areneta Ave., Cubao, Quezon City, Philippines:
Vibal Group Inc.
Business Finance Teachers Guide