SENIOR HIGH SCHOOL

BUSINESS FINANCE
Module 7/8 - Quarter 1
Basic Long-Term Financial
Concepts

Department of Education • Republic of the Philippines

Business Finance
Alternative Delivery Mode
Module 4 - Quarter 1: Basic Long-Term Financial Concepts
First Edition, 2020

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II
 SENIOR HIGH SCHOOL

BUSINESS FINANCE
Module 4 - Quarter 1
Basic Long -Term Financial
Concepts

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Department of Education ● Republic of the Philippines

III
IV
 TABLE OF CONTENTS

Page No.

Cover page III

Table of Contents V

Overview VI

General Instructions VI

Lesson 4: Basic Long-Term Financial Concepts 1

What I Need to Know? 1

What I Know 1

What’s In? 2

What’s New? 3

What is it? 3

What’s New? 7

What is it? 7

What’s more? 10

What I Have Learned? 14

What I Can do? 14

Assessment 15
Answer Key 18

Appendix 19

References 22

V
 OVERVIEW
This module covers the mathematics of finance with focus on the time value
of money. The concept of interest is explained particularly the difference between
simple and compound interest. Future and present value computations are
discussed using different cash flow patterns with the use of interest factor tables.
Basic time value of money applications is illustrated including loan amortization
examples and the net present value method in assessing the financial feasibility of
projects. Concept of risk-return trade-off is also discussed in this module.

As a learner, you are expected to read and analyze the lesson provided and
accomplish the activities and assessment included to achieve the learning
objectives emphasized at the start of the module.

GENERAL INSTRUCTIONS

For the learners: For the teacher:

To be guided in achieving the
objectives of this module, do the
following:
1. Read and follow instructions
carefully.
2. Write all your ANSWERS in
your Activity Book
3. Answer the pretest before
going through the lessons.
4. Take note and record points for
clarification.
5. Compare your answers against
the key to answers found at the
end of the module.
6. Do the activities and fully
understand each lesson.
7. Answer the self-check to
monitor what you learned in
each lesson.
8. Answer the posttest after you
have gone over all the lessons.
To facilitate and ensure the students’
learning from this module, you are
encouraged to do the following:
1. Clearly communicate learning
competencies and objectives
2. Motivate through applications
and connections to real life.
3. Give applications of the theory
4. Discuss worked-out examples
5. Give time for hands-on
unguided classroom work and
discovery
6. Use formative assessment to
give feedback
7. Introduce extensions or
generalizations of concepts
8. Engage in reflection questions
9. Encourage analysis through
higher order thinking prompts
10. Provide alternative formats for
student work
11. Remind learners to write their
answers in their Philosophy
Activity Notebook

VI
 Lesson
BASIC LONG-TERM
4 FINANCIAL CONCEPTS

What I Need to Know

At the end of this lesson, you are expected to:

1. distinguish simple and compound interest;
2. solve exercises and problems in computing for time value of money with
the aid of present and future value tables;
3. prepare loan amortization tables;
4. compute for the net present value of a project with a conventional cash-
flow pattern;
5. describe the risk-return trade-off.

What I Know

A. TRUE OR FALSE. On the space provided, write TRUE if the idea being
expressed is correct and FALSE if otherwise.
__________1. Interest represents the time value of money.
__________2. Compound interest is the product of the principal amount multiplied
by the period’s interest rate.

__________3. Simple interest is the interest paid on both the principal and the
amount of interest accumulated in prior periods.

__________4. Present value is the current value of a future amount of money, or

series of payments, evaluated at an appropriate discount rate.
__________5. The gradual extinction of a loan over a period of time by means of a
sequence of regular payments as to principal and interest due at the end of equal
intervals of time is known as amortization.

1
B. SOLVE. Write your solution and explanation.

Your father told you that he will entrust you with the funds for your college
education. He gave you two options: a) receive the money now in the amount of
P 200 000 or b) receive P 500 000 ten years from now. The investment opportunity
will provide you a 10% rate of return. Which option would you prefer?

What’s In

“A peso today is worth more than a peso tomorrow”. The time value of money
would tell us that a peso today is not equal to a peso in the future.

The most basic finance-related formula is the computation of interest. It is

computed as follows:

𝐈=𝐏 × 𝐑 × 𝐓 (Equation 4.1)

where:

I = interest
P = Principal

R = Interest rate

T = Time period
As a review, try this exercise by identifying the a) principal, b) interest rate,
and time period in the examples below.

1. Your mother invested P 18 000 in government securities that yields 6%

annually for two years.
2. Your father obtained a car loan for P 800 000 with an annual rate of 15%
for 5 years.
3. Your sister placed her graduation gifts amounting to P 25 000 in a
special savings account that provides an interest of 2% for 8 months.
4. Your brother borrowed from your neighbor P 7 000 to buy a new mobile
phone. The neighbor charged 11% for the borrowed amount payable after
three years.
5. You deposited P 5 000 from the savings of your daily allowance in a time
deposit account with your savings bank at a rate of 15% per annum. This
will mature in 6 months.

2
 What’s New

ACTIVITY 4.1 Simple and Compound Interest

A. Fill in the blanks of the table involving a simple interest.

Principal Rate Time Interest

P 8 000 1) 7 months P 210
P 15 000 4.8% 2) P 300
3) 4.5% 4 months P 500
P 1 000 4) 1 yr & 3 months P 70
P 4 500 0.25% 5 and a half years 5)

B. Complete the table for a compound interest involving P 40 000 loaned for a
period of 5 years with 6% interest compounded annually.

Principal at Interest Amount (at the end

the start of of the year)
the year
1st year P 40 000 40 000 x 0.06 x 1 = P 2 P 40 000 +P 2 400 =
400.00 P 42 400.00
2nd year
3rd year
4th year
5th year

What is It

In general business terms, interest is defined as the cost of using money over
time. This definition is in close agreement with the definition used by economists,
who prefer to say that interest represents the time value of money.

Interest is the excess of resources (usually cash) received or paid over the
amount of resources loaned or borrowed which is called the principal.

If you decided to invest your money in a bank, you will ask the banker how
much interest you will get. The banker will explain that there are two types of
interest that would be used to determine the amount of interest that you are going
to receive. Remember that interest is beneficial for you when you are receiving it
but not when you are paying it. So, it is important to know which type of interest
when deciding where to put your money and where to get the money.

3
SIMPLE INTEREST
Simple interest is the product of the principal amount multiplied by the
period’s interest rate (a one-year rate in standard).

Example 1: You invested P 10 000 for 3 years at 9% and the proceeds from the
investment will be collected at the end of 3 years. Using a simple interest
assumption, the calculation will be as follows:

Year Principal Interest Cumulative Interest Total

1 P 10 000 10 000 x 0.09 = P 900 P 900 P 10 900
2 P 10 000 10 000 x 0.09 = P 900 P 1 800 P 11 800
3 P 10 000 10 000 x 0.09 = P 900 P 2 700 P 12 700
Using the formula in Equation 4.1, simple interest can be computed.

COMPOUND INTEREST
Compound interest is the interest paid on both the principal and the amount
of interest accumulated in prior periods.

Example 2: Using example 1 where you invested P 10 000 for 3 years at 9% and
the proceeds from the investment will be collected at the end of 3 years, compound
interest will be computed as follows:

Year Principal Interest Cumulative Total

Interest
1 P 10 000 10 000 x 0.09 = P 900 P 900 P 10 900
2 P 10 900 10 900 x 0.09 = P 981 P 1 881 P 11 881
3 P 11 881 11 881 x 0.09 = P 1 069.29 P 2 950.29 P 12 950.29
For compound interest, use the formula

FV = 𝐏 (𝟏 + 𝒊)𝒏 (Equation 4.2)

where:

FV = Future Value

P = Principal

i = Interest rate per compound interest period or periodic rate

n = Time period or number of compound interest periods

Subtract the principal from the future value to get the compound interest.
Hence, Ic= FV – P.

4
FUTURE VALUE OF MONEY
To account for time value for single lump-sum payment, we use the same
formula provided for under compound interest rates as shown on Equation 4.2.

FV = 𝐏𝐕 (𝟏 + 𝒊)𝒏 (Equation 4.3)

where, PV = Present Value

(𝟏 + 𝒊)𝒏 = Future value interest factor (FVIF)*

The future value is the value of the present value after n time periods.

Example 3: Using the formula, find the future values of P 1 000 compounded at a
10% annual interest at the end of one year, two years and five years.

Solution: PV = P 1 000 and i = 0.10

Year 1 FV = P 1 000 (1 + 0.10)1 = P 1 100*

Year 2 FV = P 1 000 (1 + 0.10)2 = P 1 210*

Year 5 FV = P 1 000 (1 + 0.10)5 = P 1 610.50*

Example 4: Determine the compound amount on an investment at the end of 2

years if P 20 000 is deposited at 4% compounded a) semi-annually and b)
quarterly.

Solution: a) Given: PV = P 20 000, i = 0.04/2, n = 2 x 2 = 4

0.04 4
FV = 20 000(1 + ) = P 21 648*
2

b) Given: PV = P 20 000, i = 0.04/4, n = 4 x 2 = 8

0.04 8
FV = 20 000(1 + ) = P 21 658*
4

PRESENT VALUE OF MONEY

To get the present value of a lump-sum amount, we rearrange Equation 4.2:

PV = 𝐅𝐕 (𝟏 + 𝒊)−𝒏 (Equation 4.4)

where, (𝟏 + 𝒊)−𝒏 = Present value interest factor (PVIF)* or discount factor

Example 5: Jack would like to buy a car two years from now using the proceeds of
a 20% investment that is compounded semi-annually. If the projected price of the
car is P 1 400 000, how much money must be invested today to earn the price of
the car?

Solution:

Given: FV = P 1 400 000, i = 0.20/2, n = 2 x 2 years = 4

0.20 −𝟒
PV = 1 400 000(𝟏 + ) = P 956 200*
2

* Refer to the tables at the end of this module for FVIF and PVIF. Simply find the intersection of the relevant time
in the rows and the interest rate in the columns of the table.

5
ACTIVITY 4.2 Future Value and Present Value
A. DIRECTION: Complete the table to find the compound amount of P 50 000.00
invested at 10% interest. Show your solutions.

In 1 year In 5 years In 10 years

1. Compounded annually
2. Compounded semi-annually
3. Compounded quarterly
4. Compounded monthly
5. compounded daily

B. DIRECTION: Solve each problem.

1. Lisa receives an amount of P 20 000 deposited in her account on her 18 th

birthday. If the bank pays 6% interest monthly and no withdrawals are
made, how much should be credited in her account on his 21 st birthday?

2. James borrows P 5 000 with interest at 15% quarterly. How much should
he pay at the end of 2 years and 6 months to settle her debt?

3. Mr. Santos invested P 15 000 in an account for each of his children. The
accounts paid 8% compounded semi-annually. Determine the balance of
each account for the following:
a. The youngest child withdrew the balance after 5 years for college
b. The second child withdrew the balance after 8 years to buy a car
c. The third child withdrew the balance after 10 years to travel

4. A man wishes to accumulate P 10 000 in 2 years, how much should he

invest now at 15% compounded semi-annually?

5. What is the present worth of P 5 000 for 2 years at 12% compounded

quarterly?

6. How much should be deposited now at 10% compounded monthly to

have P 10 000 in 4 year?

7. Mr. Malakas deposited P 5 000 on the day his son was born. If the money
is worth 12% compounded quarterly, how much money will his son have
on his 21st birthday?

8. Your father entrusts you with the funds for your college education. He
gave you two options: a) receive the money now in the amount of P 200
000 or b) receive P 500 000 ten years from now. An available investment
opportunity to you provides a 10% return. Which option would you
prefer? Show your calculations and explanation.

9. Five years ago, Joe invested P 35 000 compounded semi-annually at 8%.

How much is his money now?

6
 What’s New

ACTIVITY 4.3 AMORTIZATION SCHEDULE

Direction: Complete the amortization table below of a loan of P 100 000 payable
semi-annually after 5 years at a rate of 10%. Show your solution of the first PV and
the rest of succeeding entries of columns E, B and C.
Period Unpaid PV, Interest based Interest based Amortization Unpaid PV,
Beginning on Effective on stated rate (B – C) Ending
Rate (A x (Principal x (A + D)
effective rate) stated rate)
B C D E
A
0 84 555
1 84 555 4 228 3 000 1 228
2
3
4
5
6
7
8
9
10

What is It

ANNUITIES
An installment that requires a buyer to pay equal payments at a certain
period illustrates an annuity – a series of equal cash flow – payments in this case
for a specific number of periods.

If payment is made and interest is computed at the end of each payment

interval, then it is called ordinary annuity. To get the present value interest factor
for an ordinary annuity (FVIFA) use the formula below:

1−( 1+𝑖)−𝑛
PV = R (Equation 4.5)
𝑖

7
 Where,
R = regular payment
To get the future value of an ordinary annuity, use this formula:
( 1+𝑖)𝑛 −1
FV = R (Equation 4.6)
𝑖
Example 6: What lump sum would have to be invested at 6% compounded annually
to provide an ordinary annuity of P 10 000 per year for 4 years?
Solution: Given: R = P 10 000, i = 0.06/1, n = 1 x 4 = 4
1−( 1+0.06)−4
PV = 10 000 = P 34 651*
0.06
Take note that 3.4651(rounded) is the present value factor of ordinary
annuity for 4 years at 6% according to the present value factor table (see table 3).
If the cash flow happens at the beginning of each period, then it is called a
annuity due. The formulas to use are shown below:
1−( 1+𝑖)−𝑛
PV = R(1+ i)[ ] (Equation 4.7)
𝑖
( 1+𝑖)𝑛 −1
FV = R(1+ i)[ ] (Equation 4.8)
𝑖
Example 7: If a supplier would allow you to pay P 50 000 annually at 10% for 3
years with the first payment due immediately, how much would be the
present value and the future value?
Solution: Given: R = P 50 000, i = 0.10/1 , n = 1 x 3 = 3
1−( 1+0.10)−3
PV = 50 000(1 +0.10)[ ] = P 136 775*
0.10
Take note that 2.7355 is the present value of an annuity due for 3 years at
10% according to the present value factor table (see table 5).
( 1+0.10)3 −1
FV = 50 000(1+ 0.10)[ ]= P 182 050*
0.10
Take note that 3.6410 is the future value of an annuity due for 3 years at
10% according to the future value factor table (see table 6).
If the cash flow stream lasts forever or is indefinite, then it is called a
perpetuity. The formula for present value of a perpetuity is simply
𝑅
PV = (Equation 4.9)
𝑖
LOAN AMORTIZATION
Most housing and car loans are amortizing loans that require the borrower
to pay that equal amount either annually, semi-annually, quarterly, or monthly.

* Refer to the tables at the end of this module for FVIF and PVIF of ordinary annuity and annuity due.

8
 Let us look at an example of a corporate loan to illustrate how a loan
amortization table is prepared. For some corporate long-term loans, principal
payment is fixed, and the interest expense is adjusted based on the declining
principal balance.

Example 8: On July 1, 2015, DD Company borrowed P 3 million from ASC Bank at

the rate of 10% a year. The loan is paid at the rate of P 500 000 every
December 31 and June 30 until the full amount is paid. Below is an
amortization table for the loan.

Amortization Table for P 3-million Loan

Date Payments Interest Principal Principal

Payment Balance

3 000 000

Dec. 31, 2015 650 000 150 000 500 000 2 500 000

June 30, 2016 625 000 125 000 500 000 2 000 000
Dec. 31, 2016 600 000 100 000 500 000 1 500 000

June 30, 2017 575 000 75 000 500 000 1 000 000

Dec. 31, 2017 550 000 50 000 500 000 500 000

June 30, 2018 525 000 25 000 500 000 -

To compute for the interest expense from June 30 to December 31, 2015:

Interest = 3 000 000 x 10% x (6 /12)

= 150 000

To compute for the equal regular payment, use the formula in Equation 4.5,
that is
PV PV
R= 1−( 1+i)−n or R= (Equation 4.10)
PVIFA
i

Example 9: You borrowed P 50 000 from a bank to buy a mobile phone. Assuming
you need to repay the loan by equal payments at the end of every 6 months
for 3 years at 10% interest compounded semi-annually. What is your
periodic payment?

Solution: Given: PV = P 50 000, i = 0.10/2, n = 2 x 3 = 6

50 000
R= = P 9 850.86
5.0757∗

* Refer to the table at the end of this module for PVIF of ordinary annuity.

9
 ACTIVITY 4.4 LOAN AMORTIZATION
Using the problem in example 9, construct an amortization schedule
by filling up the table below. Show your solutions for column B by using the
formula: I = Prt.

Period Periodic Interest at Amount repaid Outstanding

Payment at 10% due at to the Principal Principal at
the end of the end of at the end of the end of
every 6 every 6 every 6 months every 6
months months months
C
A B D

0 P 50 000.00

2
3
4

Total

What’s More
NET PRESENT VALUE METHOD
One useful application of the time value of money is using the Net Present
Value Method to determine whether a project should be accepted or rejected by a
company. The basic decision rule is to accept the project if the net present value is
positive and reject if it is negative. The basic formula is:

NPV = PV of Inflows – PV of Outflows

or

NPV = PV of Future Cash Flows – Initial Investment (Equation 4.11)

Example 10: A company wants to purchase an equipment that will cost P 100 000
and estimated to be used for 5 years. Operating cash inflows from the use
of equipment would be P 50 000 while annual operating cash outflows (due
to repairs and maintenance) are estimated at P 10 000. Compute for the
NPV.

10
 Solution:

1−( 1+0.10)−5
PV of Future Cash Flows = 40 000 = P 40 000 x 3.7908
0.10

PV of Future Cash Flows = P 151 632

NPV = PV of Future Cash Flows – Initial Investment

= 151 632 – 100 000

= P 51 632

Since the NPV is positive, this means that the benefit to be derived from the
project is higher than the cost which would mean to accept the investment.

ACTIVITY 4.5 ARE YOU A RISK TAKER?

Do you have what it takes to make it? Let’s find out:

Write down the letter of the answer you select on a piece of paper for scoring!
Compare your score with your classmates.
1. You are driving to meet some friends. You’re running late. The traffic light
ahead turns yellow. You:

a. Always stop at yellow no matter what.

b. Break and stop at the light. You’re late anyway, right?
c. You beat the light.
2. Your friend gives you a tip. She heard this stock is going to go through the
roof in the next week. You:
a. Hear this stuff all the time, know it’s not true and ignore her.
b. Nod, squint your eyes, log into E*Trade and invest a few.
c. Take all that money you had for a rainy day and invest.
3. You are a really cool partygoer. Your bf/gf is with you. You see this
seriously cute hottie across the room. You:
a. Look at your boy/girl, order yourself another drink and continue on with
your conversation.
b. Envision a plan where if the stars aligned and you were both at the bar at
the same time you would definitely have something to talk about. [+2]
c. Immediately excuse yourself and head across the room.

4. You’re with a friend in a carnival. You walk into this interesting tent. In
the center is a cobra in a cage. People are queued up to pay a hundred for a
chance to grab the five-hundred bill on top of the snake's cage. You:
a. Leave.

b. Stick around to see the free show.

c. Exclaim, “Heck, I’ve got a hundred!” And get in line.

11
5. You’re sitting next to this old man on a jeepney. It’s obvious he hasn’t
showered and smelling alcohol while he naps through the trip. When he
wakes up he starts talking to you, explaining how he can help your
business. You:

a. Thank him politely and inside your head you can’t wait to get off.
b. Give him your business card and ask for his, knowing full well this guy is
full of crap.

c. You try to find a polite way to tell him his body odor offends.
6. It’s the dreaded annual company Christmas party. The CEO is a little
enebriated and asks if anyone else would like to get up to attest to the
company’s good fortune. You:
a. Put your head down in shame.

b. Chuckle with most of the crowd.

c. Realize this is your time to shine and head up to the front.

7. You’ve spent time researching the perfect part of town to buy a property.
You think you have all your bases covered, but investing in this property
will definitely put you and your family out there. You:
a. Decide it’s better to wait until you have more of a cushion.

b. Buy the property and hope for the best.

c. Are so convinced the deal is so good, you buy two. The other with money
from a 2nd mortgage on your home.

8. Today is your birthday and you are on a trip with friends to celebrate.
Everyone has been drinking and the gang decides it’s the perfect time to
rent gears from the resort and go bungee jumping. You:

a. Tell your friends you’ll greet them when they get back.

b. Go ask around for a car to hire and recommendations on the best places
to drink in town.

c. You are the first one tethered to the cord.

Scoring:
For every answer A, award yourself 1 point
For every answer B, award yourself 2 points
For every answer C, award yourself 3 points
So, what kind of risk taker are you? Well, if you scored from

8 – 10 Death warmed over. Check your pulse. Are you even alive? What are you
doing with your life?

11 – 13 Nervous Nelly. Come on, it’s time for you step it up. You want to be more
adventurous. Try a little harder.

12
14 – 16 Risk Master General. Nice. You know how to balance risk with reward.
This is exactly where you want to be. You know how to have a good time and you
will be very successful.

17 – 19 You’re the Pusher. You like to push the envelope. That’s great! Just be
careful. Scale it back from time to time. Risk is not its own reward.
20+ You have serious issues and you should seek professional help. If you haven’t
crashed and burned yet, you will soon.

Questions:

1. Which category did you belong?

2. Do you think it reflects your personality? Why?
3. Are your choices the same as your classmates?
4. Which category did most belong?

RISK-RETURN TRADE-OFF

In finance, we assume that individuals are risk averse but have different
levels of risk aversion. Risk aversion means that individuals maximize returns for a
given level of risk or minimize risk if the returns are the same. Risk-averse
individuals would require a higher return if the risk level increases.

In general, the riskier the investment, the higher the potential return should
be, indicating a direct relationship between risk and potential return. As a business
owner you should know to balance the risk and the potential return of your
investments.

Risk is defined here as the uncertainty of returns. One way to reduce risk to
an acceptable level is through diversification wherein you invest in different types
of investments with different risks and returns. This is an application of the saying:
“ Don’t put all your eggs in one basket.”

13
 What I Have Learned

ACTIVITY 4.6 DISCUSSION QUESTIONS

Answer as briefly as you can.

1. Differentiate simple interest from compound interest.
2. Explain the concept of time value of money.
3. Differentiate between present value and future value.
4. What is the difference between an ordinary annuity and annuity due?
5. What does an amortization table show?
6. Explain the purpose of the net present value.
7. Explain the concept of risk-return trade-off.

What I Can Do

ACTIVITY 4.6 BUSINESS APPLICATIONS

Solve and show your solution and explanations in a separate paper.

1. CM Company borrowed P 2 000 000 from a bank on June 30, 2015. The
loan has an annual interest rate of 10% and the principal is payable at the
end of every quarter amounting to P 25 000. The first quarterly payment will
be on September 30, 2015. Prepare an amortization schedule for 2015 until
the loan is fully paid on June 30, 2017. How much interest expense is
incurred in 2015 and 2016 with respect to this loan?

2. A firm is evaluating two projects. The firm’s cost of capital (appropriate

discount rate) has been determined to be 9%, and the projects have the
following initial investments and cash flows:

Project Q Project Y

Initial Investment: P 50 000 P 48 000

Cash Flows: 1 P 20 000 P 30 000

2 25 000 35 000

3 15 000 40 000
4 20 000 10 000

Which project should the company pursue? Why?

14
 Assessment

A. DIRECTION: Fill the blanks with the correct answer. Write all your answers in a
separate answer sheet.
1. ________is the excess of resources (usually cash) received or paid over the
amount of resources loaned or borrowed.
2. ________ is the interest paid on both the principal and the amount of interest
accumulated in prior periods.
3. Future value interest factor (FVIF) is represented by the formula
____________.
4. An installment that requires a buyer to pay equal payments at a certain
period is called ___________.
5. __________means that individuals maximize returns for a given level of risk
or minimize risk if the returns are the same.
6. The basic decision rule is to accept the project if the net present value is
_________.
7. If the cash flow stream lasts forever or is indefinite, then it is called
___________.
8. If payment is made and interest is computed at the end of each payment
interval, then it is called _____________.
9. One way to reduce risk to an acceptable level is through ___________ wherein
you invest in different types of investments with different risks and returns.
10. If the cash flow happens at the beginning of each period, then it is called
___________.
B. Multiple Choice
1. In a loan amortization schedule, interest payments for each period would
most probably
a. Increase overtime c. Remain the same
b. Decrease overtime d. There are no interest payments in the
schedule.
2. The formula (1 + i)n is also called
a. present value factor for lump-sum payment
b. future value factor for lump-sum payment
c. present value factor for ordinary annuity
d. future value factor for ordinary annuity

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3. An increase in the present value may be caused by

a. increase in the discount rate

b. decrease in the discount rate

c. discount rate does not affect the present value

d. none of the above

4. Interest payments that are based on the original principal and previous
interest recognized is based on

a. present value c. simple interest rate

b. future value d. compound interest rate

5. The time value of money suggest that a peso received today is worth _______
a peso received in the future.

a. less than c. the same as

b. more than d. none of the above

6. You invest P 5 000 today at an interest rate of 10% for four years, how much
would be the future value of the investment?

a. P 3 415 b. P 7 000 c. P 6 500 d. P 7 320

7. You are an incoming college freshman taking-up a four-year course.

Suppose that you want to purchase a car immediately after graduating
which will cotst you P 750 000. How much should you invest at the end of
every year in an investment fund that earns 9% annually to have enough to
buy the car upon graduation?

a. P 164 000 b. P 531 300 c. P 607 445 d. P 132 828

8. If you invest a lump-sum amount of P 25 000 at an interest rate of 12%,

compounded monthly, how much would be your investment after 3 years?

a. P 34 000 b. P 35 123 c. P 39 338 d. none of the above

9. An equipment with a cost of P 100 000 is expected to generate returns of

P 90 000; P 60 000 and P 50 000 for the first, second and third year,
respectively. Using a discount rate of 12%, what is the NPV of the project?

a. P 60 121 b. P 79 341 c. P 83 431 d. P 63 778

10. What is the present value of a 6% investment that would pay P 30 000
annually perpetually?

a. P 500 000 b. P 450 000 c. P 300 000 d. none of the above

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DIRECTION: Solve the following problems.

1. You will invest P 30 000 into an investment that will earn 10% every year for
5 years.

a. How much would you receive after 5 years if the 10% is a simple interest
rate?

b. How much would you receive after 5 years if the 10% is a compound
interest rate?

2. ABC Company expects to receive P 1 000 five years from now and wants to
know what this money is worth today. Calculate the value today of P 1 000
discounted at 10%.

3. Find the amount of P 5 000 ordinary annuity payable quarterly for 3 years.
Money is worth 12% converted quarterly.

4. Consider the given annuities:

A: P 1 000 deposited at the beginning of each month for 3 years at 12%

compounded semi-annually.

B: P 3 000 deposited at the beginning of each quarter for 3 years at 12%

compounded quarterly.

Calculate the amount of each annuity. Compare the two annuities.

5. A mortgage of P 80 000 is to be paid by annual payment over a period of 10

years. If the interest rate is 15.8% effective.

a) calculate the annual payment;

b) construct an amortization schedule;

c) find the total payment made;

d) find the total interest paid

6. A project requires an initial outlay of P 100 000. The relevant inflows

associated with the project are P 60 000 in year one and P 50 000 in years
two and three. The appropriate discount rate for this project is 11%.
Compute the net present value. Should the company accept the project?

17
 Congratulations!
You have completed your
journey in this subject. Great job!

It’s now time to go, explore, and

apply all
your learning’s here

References
Canayan, Arthur S. and Daniel Vincent H. Borja. 2017. Business Finance, First
Edition. Manila: Rex Book Store

Florenz C. Tugas, Florenz C. et al.. Business Finance. Araneta Avenue, Quezon

City: Vibal Group Inc.
Oronce, Orlando A. 2016. General Mathematics, First Edition. Manila: Rex Book
Store

https://www.cnbc.com/id/26335784

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