SENIOR HIGH SCHOOL

BUSINESS FINANCE
Module 4 - 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 of

the start of the year)
the year
1st year P 40 000 40 000 x 0.06 x 1 = P 2 400.00 P 40 000 +P 2 400 =
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, I c=
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 21st 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 years?

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 21 st
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 on Amortization Unpaid PV,
Beginning on Effective Rate stated rate (B – C) Ending
(A x effective (Principal x (A + D)
rate) stated rate)
A B C D E
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

Where,
R = regular payment

7
 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 10% Amount repaid to Outstanding

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

0 P 50 000.00
1
2
3
4
5
6
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.

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

10
 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.
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.

11
6. It’s the dreaded annual company Christmas party. The CEO is a little inebriated 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.
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.

12
 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.”

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.

13
 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 cost 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?

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

17
 Lesson 4
Lesson 4
Assessment
What I Know
A. Fill in the blanks
True or False
1. Interest 6. positive
1. True
2. Compound interest 7. Perpetuity
2. False
3. (1 + i)n 8. Ordinary Annuity
3. False
4. Annuity 9. Diversification
4. True
5. Risk aversion 10. Annuity due
5. True
B. Multiple Choice
Solve
Answer Key

1. b 6. d
a) PV = P 192 750
2. b 7. b
b) FV = P 518 740
3. a 8. d
Choose to receive the P 200 000 today since
4. d 9. d P 200 000 > 192 750 (PV) of P 500 000.

5. b 10. a

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C. Problem Solving

1. a) FV = P 45 000

b) FV = P 48 315

2. PV = 620.10

3. PV = P 49 770

4. A: FV = P 7 393.80

B: FV = P 14 617.80

5. a. P 16 429.01

b.

c. P 164 290.10

d. P 84 290.11

6. NPV = P 31 195.57

Since the NPV is positive, the company should

accept the project.
 APPENDIX
Table 1 Present Value Interest Factor

Table 2 Future Value Interest Factor

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Table 3 Present Value Interest Factor of an Ordinary Annuity

Table 4 Future Value Interest Factor of an Ordinary Annuity

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Table 5 Present Value Interest Factor of an Annuity Due

Table 6 Future Value Interest Factor of an Annuity Due

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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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For inquiries or feedback, please write or call:
Department of Education – Division of Misamis Oriental
Don A.Velez St., Cagayan de Oro City
Contact number: 0917 899 2245
Email address: misamis.oriental@deped.gov.ph

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