Bus Finance-Week 2

UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
SENIOR HIGH SCHOOL DEPARTMENT
1st Semester, School Year 2021 – 2022
MODULE IN BUSINESS FINANCE
Week #: 2 Grade & Strand: Grade 12 ABM

Quarter: 2nd Subject Teacher: Ms. Glennys E. Madarang
Basic Long-Term Financial Concepts
Content Standards
The learner demonstrates an understanding of the basic concepts of risk and
return, and the time value of money.
Performance Standards
The learner shall be able to apply mathematical concepts and tools in
computing for finance and investment problems and calculate future value
and present value of money.
Student Learning Competencies

At the end of the lesson, the student should be able to:
 distinguish simple and compound interest;
 calculate future value and present value of money; and
 compute loan amortization using mathematical concepts and the present value tables.
Basic Long-Term Financial Concepts
MOTIVATION
This story is based on the Parable of talents from the Bible. It has been modified for the purpose
of discussion.
One day, the Master was going on a trip and decided to entrust his wealth to three of his
most trusted servants. The wealth shall be given to each servant based on the master’s
assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant,
believing that he can make wise choices as well, he also gave an amount of PHP500,000. Finally,
he called on his third servant and gave him PHP500,000. The Master then went on his journey
and told the servants he will not be back for a long time. Since the first servant was a very smart
person, he decided to invest the PHP500,000 given to him. He was very pleased that he was
quoted a long-term investment for 5 years at 8% per annum compounded annually and decided
to invest the money in that institution. The second servant saw what the first servant did and also
decided to invest the money. However, when given the choice by the investment firm, he did not
understand simple and compound interest. In the end, he accepted the quote at 8% per annum
simple interest. The third servant saw them and thought that they were being too much of a risk-
taker and decided just to keep the money locked in a vault in his home.
The Master returned after 5 years. He then called on the servants and asked them what
has become of the wealth he had entrusted them. The first servant presented his PHP500,000
Alabang-Zapote Road, Pamplona 3, Las Piñas City, 1740 Philippines • Tel. No.: (02) 871-0639
www.perpetualdalta.edu.ph
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UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04. The second
servant presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000
Lastly the third servant returned his PHP500,000.
Servant 1 Servant 2 Servant 3

Principal 500,000.00 500,000.00 500,000.00
Interest 234,664.04 200,000.00 0
Total Returned 734,664.04 700,000.00 500,000.00
Which servant will make the Master most pleased?
The Concept of Interest

The most basic finance-related formula is the computation of interest. It is computed as
follows:
I=PxRxT
I = Interest I
P = Principal
R = Interest Rate
T = Time Period P R T
Example:
1. Sarah borrowed ₱ 1,000.00 from a local bank at an interest rate of 9% over a one-year period.
Computed as:
I=PxRxT
Given: P = ₱1,000.00 Find: I
R = 9%
T = 1year
I = ₱ 1,000.00 x 9% x 1yr
₱ 90
2. Ofelia borrowed ₱4,000.0 at ₱960.00 interest for 2years. Find the interest rate:
Given: P = ₱4,000.00 Find: R
I = ₱960.00
T = 2years
I
R=
PxT
R = ₱ 960.00
₱ 4,000.00 x 2
R = 12%
Simple Interest
If the interest earned or incurred is always based on the original principal, then simple
interest is assumed.
For example:
You invested ₱10,000.00 for 3years at 9% and the proceeds from investment will all be
collected at the end of 3years. Using the simple interest assumption, interest will be computed as
follows:
I=PxRxT
Given: P = ₱10,000.00 Find: I
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UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
R = 9%
T = 3years
I = ₱ 10,000.00 x 9% x 3years
₱ 2,700.00
Year Principal Rate Time Interest Cumulative Total

Interest
1 ₱10,000.00 9% 1 ₱900 ₱900.00 ₱10,900.00
2 ₱10,000.00 9% 1 ₱900 ₱1,800.00 ₱11,800.00
3 ₱10,000.00 9% 1 ₱900 ₱2,700.00 ₱12,700.00
Compound Interest
- Earning interest on interest. This means that the basis for the computation of the
applicable interest for a certain period is not only the original principal but also any
interest earned in the previous period assuming all cash flows would be paid or
received in lump sum upon maturity.
Using the previous example where you invested P10 000 for 3 years at 9% and the
proceeds from the investment will all be collected at the end of 3 years; we illustrate the
computation of compound interest. Using a compound interest assumption, interest will be
computed as follows:
I=PxRxT
Given: P = ₱10,000.00 Find: I
R = 9%
T = 3years
YEAR 1 I = ₱ 10,000.00 x 9% x 1year
₱ 900.00
Total = ₱ 10,900.00
YEAR 2 I = ₱ 10,900.00 x 9% x 1year

₱ 981.00
Total = ₱ 11,881.00
YEAR 3 I = ₱ 11,881.00 x 9% x 1year

₱ 1,069.29
Total = ₱ 12,950.29
Year Principal Rate Time Interest Cumulative Total

Interest
1 ₱10,000.00 9% 1 ₱900 ₱900.00 ₱10,900.00
2 ₱10,900.00 9% 1 ₱981 ₱1,881.00 ₱11,881.00
3 ₱11,881.00 9% 1 ₱1,069.29 ₱2,950.29 ₱12,950.29
Under this assumption, the interest for every year is no longer the same but is higher as it
nears maturity. The total interest for the three-year period is ₱2,950.29. This is the sum of the
increasing interest for the three-year period (₱900 + ₱981 + ₱1,069.29).
Future Value of Money

Future Value
- The future value is the value of the present value after n period. On the other hand, i
is the effective interest rate that would take into account all associated costs of
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UNIVERSITY OF
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SYSTEM DALTA
holding money (e.g opportunity cost and inflation). The given formula can also be
manipulated for us to compute the present value as shown:
FV=PV(1+r) n
FV = future value
PV = present value
r = annual interest rate
n = number of periods interest held
In the previous example, the value of the investment at the end of the year 1 is equal to
₱10,900.00 computed as follows:
FV=PV(1+r) n
FV=₱10,000.00(1+9%)
FV=₱10,900.00
Therefore, say that given an interest rate of 9%, the future value of ₱10,000.00 after one year is
₱10,900.00
Similarly, the future value of the ₱10,000.00 at the end of year 2 will be equal to the value at the
end of year 1 plus the compound interest earned in year 2 as shown below:
FV=PV(1+r) n
FV=₱10,000.00(1+9%)2
FV=₱11,881.00
The future value then at the end of year 3 is determined as follows:
FV=PV(1+r) n
FV=₱10,000.00(1+9%)3
FV=₱12,950.29
To get the future value, we multiply the initial value by (1 + r) n which referred to as the future
value interest factor (FVIF).
Using our example, the FVIF given 3 years and rate of 9% is equal to 1.2950. This is the
intersection of time period = 3 and interest rate =9% in the FVIF table.
FVIF = (1 + 9%) 3
= 1.2950 (rounded off to 4 decimal places
Rate /
1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
period
1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000
2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100
3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310
4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3805 1.4116 1.4641
5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105
Present Value of Money
Future Value
Present Value =
(1 + r) n
To get the present value, we multiply the future lump-sum amount by1/ (l+ r) n which is
referred to as the present value interest factor (PVIF). The PVIF is also called discount factor
and the whole process of determining the present value is referred to discounting. The interest
rate used to get the present value is denoted as the discount rate.
Example 1:
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UNIVERSITY OF
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SYSTEM DALTA
Your father told you that he will entrust you with funds for your graduate program
education. That available investment opportunities to you provide a 10% rate of return. He gave
you two options:
1. Receive the money now in the amount of ₱200,000; or
2. Receive ₱500,000.00 ten years from now.
Which option do you prefer?
Solution for number 1.

FV=PV(1+r) n
FV=₱200,000.00(1+10%)10
FV=₱518,748.50
₱518,748.50 > ₱200,000.00
Solution for number 2.

Future Value
Present Value =
(1 + r) n
₱500,000.00
Present Value =
(1 + 10%) 10
Present Value = ₱192,771.64
₱192,771.64< ₱200,00.00
Since the P200 000 is greater than ₱192,771.64 (the present value of the P500,000.00). You
will choose to receive the ₱200,000.00 today instead of waiting for it in ten years’ time. Getting
it now will give you the opportunity to grow the investment at the rate of 10% and the related
future value is expected to be greater than the P500 000.
Example 2:
For example, your school’s annual tuition fee is ₱100,000.00 per year if you pay at the
start of the school year. Another option is to pay the tuition fee at the end but at a higher amount
of ₱110,000.00
Let us say that the prevailing interest rate is equal to 12%. To make the cash flow
comparable, we compute the present value of ₱110,000.00:
₱110,000.00
Present Value =
(1 + 12%) 1
Present Value = ₱ 98,214.29
The present value of ₱110,000.00 is equal to ₱ 98,214.29 which is cheaper than paying
₱100,000.00 at the start of the school year. So, if you forego paying at the start, you can invest
the ₱100,000.00 for one year at a rate of 12%. This will grow to ₱112,000.00 (₱100,000.00 x 1 +
12%) after a year which is more than enough to pay for the required ₱100,000.00 payment at the
end of the year
Will your decision be different if the interest rate is at 8%? The present value of the
₱100,000.00 is:
₱110,000.00
Present Value =
(1 + 8%) 1
Present Value = ₱ 101,859.90
₱ 101,859.90 is more expensive than the ₱ 100,000.00 option at the start of the school
year. At an interest rate of 8%, you should choose to pay the ₱ 100,000.00 immediately instead.
If you insist on paying at the end, your ₱ 100,000.00 will grow to ₱ 108,000.00 (₱100,000.00 x 1
+ 8) which is not enough to cover for the required payment of ₱ 110,000.00 at the end.
Las Piñas Campus
UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
Reference/s:
 Business Finance: Theory and Practice. (2017). Manila City: Abiva Publishing House,
Inc.
 Cayanan, A., & Borja, D. (2017). Business Finance. Manila City: Rex Book Store .
 Flores, M. (2017). Business Finance. Quezon City: Phoenix Publishing House.
Online Sources:
 CNN Philippines 2020. Retrieved from
https://cnnphilippines.com/business/2020/8/20/BSP-interest-rate-decision-August-
2020.html
 Simple Interest formula by The Organic Chemistry Tutor 2017. Retrieved from
https://www.youtube.com/watch?v=NCYNXkbTTUo
 Teaching Guide for Senior High School. Business Finance. Retrieved from
https://drive.google.com/file/d/0B869YF0KEHr7amFlR2pJM3lCdXM/view
Las Piñas Campus
UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
SENIOR HIGH SCHOOL DEPARTMENT

1st Semester, School Year 2021 – 2022
ANSWER SHEET IN BUSINESS FINANCE
Name: Gr/Section:
Teacher: Week #: 2 Quarter: 2nd
QUIZ 1:
Identify the principal, interest rate, and time period. Compute the following problems:
1. Your mother invested ₱18,000.00 in government securities that yields 6% annually for
two years. Compute for the interest.
Answer:
principal=18,000
interest rate=6%
time period=2 years
Interest: Php 2,160
2. Your father obtained a car loan for ₱800,000.00 with an annual rate of 15% for 5 years.
How much is the interest of a car loan?
Answer:
principal=800,000
interest rate=15%
time period=5 years
Interest: Php 600, 000
two years. How much is the total investment of your mother after 2 years?
Answer:
principal=18,000
interest rate=6%
time period=2 years
Interest: Php 4,320
How much is the total amount of car loan of your father after 5years?
Las Piñas Campus
UNIVERSITY OF
PERPETUAL HELP
SYSTEM DALTA
two years. Compute for the cumulative compound interest.
How much is the cumulative compound interest of a car loan?
two years. Compute for the future value at the end of 2 years.
Compute for the future value at the end of 5 years.
9. Your mother is expecting to get ₱18,000.00 in two years’ time after investing in
government securities that yields 6% annually. Compute for the present value.
10. Your father obtained a car loan payable in lump-sum in 5 years at a total amount of
₱800,000.00 with an annual rate of 15%. Compute for the present value.
Las Piñas Campus

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UNIVERSITY OF

Week #: 2 Grade & Strand: Grade 12 ABM

Basic Long-Term Financial Concepts

Student Learning Competencies

Basic Long-Term Financial Concepts

Servant 1 Servant 2 Servant 3

Which servant will make the Master most pleased?

The Concept of Interest

Year Principal Rate Time Interest Cumulative Total

YEAR 2 I = ₱ 10,900.00 x 9% x 1year

YEAR 3 I = ₱ 11,881.00 x 9% x 1year

Year Principal Rate Time Interest Cumulative Total

Future Value of Money

Present Value of Money

Solution for number 1.

Solution for number 2.

SENIOR HIGH SCHOOL DEPARTMENT

ANSWER SHEET IN BUSINESS FINANCE

Interest: Php 2,160

Interest: Php 600, 000

Interest: Php 4,320

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