SHS

Business Finance
Week 6 to 8 – Module 8
Business Finance
Grade 12 Week 6 to 8 – Module 8
First Edition, 2020

Copyright © 2020
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form without
written permission from the copyright owners.

Development Team of the Module

Author: Mary Ann D. Cacayuran, T II

Editor: SDO La Union, Learning Resource Quality Assurance Team
Illustrator: Ernesto F. Ramos Jr., P II

Management Team:

ATTY. Donato D. Balderas, Jr.

Schools Division Superintendent
Vivian Luz S. Pagatpatan, Ph.D
Assistant Schools Division Superintendent
German E. Flora, Ph.D, CID Chief
Virgilio C. Boado, Ph.D, EPS in Charge of LRMS
Erlinda M. Dela Peña, Ed.D, EPS in Charge of Mathematics
Michael Jason D. Morales, PDO II
Claire P. Toluyen, Librarian II
Business Finance
Week 6 to 8 – Module 8
 TARGET

Money has a present value (PV), which is the value of your money today. For
example, if you had Php100 in your pocket, the present value would be Php100.
Money also has a future value (FV) considering compound interest. If you put the
same Php100 in the bank at 10% interest the FV would be Php110 in one year.

Future value and present value are monetary concepts that a business owner
uses every day, whether he realizes it or not. The idea is simple: Money in your
pocket today is worth more than the same amount received several years in the
future. The difference is the effect of inflation and the risk that you may not actually
receive the money you expect in the future.

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

1. calculate the future value and present value of money (BF12-IIIg-h-18); and
2. compute loan amortization using mathematical concepts and present value
tables (BF12-IIIg-h-20).

Before going on, check how much you know about this topic. Answer
the pretest in a separate sheet of paper.

FUTURE VALUE, PRESENT VALUE AND LOAN AMORTIZATION

In this activity, it will help you to introduce the concept of future and present
value of money and loan amortization.

Pretest

Direction: Read each item carefully. Use a separate sheet for your answers. Write the
letter of the best answer for each item.
1. It is the money that you have right now will be worth more over time.
A. future value
B. past value
C. present value
D. time value of money
2. What formula you are going to use if you put your money in the bank which earned
interest?
A. PV = FV / (1 + r)n
B. PV = FV (1 + r)n
C. FV = PV (1 + r)n
D. FV = PV / (1 + r)n

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3. It is a type of loan with scheduled, periodic payments that are applied to both
the loan's principal amount and the interest accrued.
A. abandoned loan
B. amortized loan
C. depreciated loan
D. regular loan
4. How is the interest of an amortized loan calculated?
A. It is calculated based on the most recent beginning balance of the loan.
B. It is calculated based on the most previous ending balance of the loan.
C. It is calculated based on the most recent ending balance of the loan.
D. It is calculated based on the most recent beginning balance of the loan.
5. What formula you are going to use if you you need to save today to have a specific
amount at some point in the future.
A. PV = FV / (1 + r)n
B. PV = FV (1 + r)n
C. FV = PV (1 + r)n
D. FV = PV / (1 + r)n
6. In the formula of computing the future and present value of money, what is r?
A. equals how much he needs to have today
B. equals how much he will need in the future
C. equals the interest rate he/she will earn on the money
D. equals the number of periods before he needs the money
7. An amortized loan is the result of a series of _______________.
A. calculations
B. decisions
C. planning
D. performance
8. What are the variables that are used to calculate the time value of money?
A. present value and future value
B. present/future value and interest rate
C. present/future value and number of periods
D. present/future value, interest rate, and number of periods
9. Common amortized loans include auto loans, home loans, and personal loans from
a bank for small projects or __________________.
A. cash allowance
B. debt consolidation
C. depreciation
D. investment
10. In the formula of computing the future and present value of money, what is n?
A. equals how much he needs to have today
B. equals how much he will need in the future
C. equals the interest rate he/she will earn on the money
D. equals the number of periods before he needs the money

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 JUMPSTART

Time Value of Money

One of the most fundamental concepts in finance is the Time Value of Money. It
states that “A peso today is worth more than a peso tomorrow.”
The time value of money is a concept integral to all parts of business. A
business does not want to know just what an investment is worth today; it wants to
know the total value of the investment.
Let us take a look at the given situation.
Danna was puzzled about something, so she went to talk to Betty about it. She
told her friend that the problem is whether she would want a peso today or a peso one
year from now. She doesn't see what the difference is, since it's still one peso, no
matter when you get it.
Betty had to think about this for a while. When she sees Danna again, she tells
her to take that peso now and put it in a savings account. The bank will pay interest,
so one year from now she'll have more than one peso.
To sum up the time value of money, money that you have right now will be
worth more over time. So one dollar now will be worth more than a dollar in a year
from now.

DISCOVER

Future Value

Danna went home and did some research and she discovered a formula for future
value, or how much money put in the bank today will turn into at some point in the
future with the interest. She needs to know three things:

1. How much she has now?

2. What the interest rate is?
3. How many years she wants to put the money away for?

Then she can use a formula to figure out how much she'll have at the end. The
formula is:

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FV = PV (1 + r)n

In this formula,

 PV is how much she has now, or the present value

 r equals the interest rate she will earn on the money
 n equals the number of periods she will put the money away, and
 FV equals how much she will have at the end, or future value.

Let's imagine that Danna puts Php100 in the bank for five years at five percent
interest, and plug that into the equation.

Solution:

FV = 100 (1 + 0.05)5

FV = 100 x 1.2762

FV = Php127.62

Present Value

Danna's parents think she's a pretty smart girl, especially after she shows her
Dad these cool formulas. Dad knows he will need money in a few years to pay for
Danna's college. He's wondering how much he can invest today in some CDs that
would be worth $20,000 or so in 10 years when he'll need it. Danna shows him a
formula for present value, or how much you need to save today to have a specific
amount at some point in the future. Here's the formula:

PV = FV / (1 + r)n

In this formula,

 PV equals how much he needs to have today, or present value

 r equals the interest rate he'll earn
 n equals the number of periods before he needs the money, and
 FV equals how much he will need in the future, or future value.

So, if Dad needs the Php20,000 in 10 years and can invest what he has for five
percent, let's find out how much he needs to invest today.

Solution:

PV = Php20,000 / (1.05)10

PV = Php20,000 / 1.6289

PV = Php12,278

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Her dad is very happy to hear that.

Loan Amortization

What is an Amortized Loan?

An amortized loan is a type of loan with scheduled, periodic payments that are
applied to both the loan's principal amount and the interest accrued. An amortized
loan payment first pays off the relevant interest expense for the period, after which the
remainder of the payment is put toward reducing the principal amount. Common
amortized loans include auto loans, home loans, and personal loans from a bank for
small projects or debt consolidation.

How an Amortized Loan Works?

The interest on an amortized loan is calculated based on the most recent ending
balance of the loan; the interest amount owed decreases as payments are made. This
is because any payment in excess of the interest amount reduces the principal, which
in turn, reduces the balance on which the interest is calculated. As the interest
portion of an amortized loan decreases, the principal portion of the payment increases.
Therefore, interest and principal have an inverse relationship within the payments
over the life of the amortized loan.

An amortized loan is the result of a series of calculations. First, the current

balance of the loan is multiplied by the interest rate attributable to the current period
to find the interest due for the period. (Annual interest rates may be divided by 12 to
find a monthly rate.) Subtracting the interest due for the period from the total monthly
payment results in the dollar amount of principal paid in the period.

The amount of principal paid in the period is applied to the outstanding balance
of the loan. Therefore, the current balance of the loan, minus the amount of principal
paid in the period, results in the new outstanding balance of the loan. This new
outstanding balance is used to calculate the interest for the next period.

Equal Principal Repayments

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.

Illustrative Example: On July 1, 2015, DD Company borrowed Php3 million from ASC
Bank at the rate of 10% a year. The loan is paid at the rate of Php500 000 every

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 December 31 and June 30 until the full amount is paid. Below is an amortization table
for the loan.

Amortization Table for Php3-Million Loan

Amortization Dates Payments Interest Principal Principal Balance
Payment
3 000 000
December 31, 2015 650 000 150 000 500 000 2 500 000
June 30, 2016 625 000 125 000 500 000 2 000 000
December 31, 2016 600 000 100 000 500 000 1 500 000
June 30, 2017 575 000 75 000 500 000 1 000 000
December 31, 2017 550 000 50 000 500 000 500 000
June 30, 2018 525 000 25 000 500 000 -

Note that the interest rate of 10% is for one year. Therefore, for six months, the
interest rate is only 5%. Let us compare the interest expense from June 30 to
December 31, 2015.
Interest = 3 000 000 x 10% x (6 ÷ 12)
Interest = 150 000
For the next six months ending June 30, 2016, the interest expense is only
Php125 000 because the principal balance is already reduced to Php2 500 000 as of
December 31, 2015.
Thus, the part of semi-annual payment is for the repayment of principal and
interest payments.

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 EXPLORE

Here are some enrichment activities for you to work on to master and strengthen
the basic concepts you have learned from this lesson.

Activity 1: Find My Future Value!

Direction: Using the given situations, compute for the future value at the end of term
of each scenario.

1. Your mother invested Php18 000 in government securities that yields 6% annually
for two years.

2. Your father obtained a car loan for Php800 000 with an annual rate of 15% for 5
years.

3. Your sister placed her graduation gifts amounting to Php25 000 in a special savings
account that provides an interest of 2% for 8 months.

4. Your brother borrowed from your neighbor Php7 000 to buy a new mobile phone.
The neighbor charged 11% for the borrowed amount payable after three years.

5. You deposited Php5 000 from the savings of your daily allowance in a time deposit
account with your savings bank at a rate of 1.5% per annum. This will mature in 6
months.

DEEPEN

Activity 2: Find My Present Value!

Direction: Using the situations provided in Activity 1, compute the present value of
each scenario.

1. Your mother is expecting to get Php18 000 in two years’ time after investing in
government securities that yield 6% annually.

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2. Your father obtained a car loan in lump-sum in 5 years at a total amount of Php800
000 with an annual rate of 15%.

3. Your sister placed her graduation gifts in a special savings account that provides an
interest of 2% for 8 months. She expects to get Php25 000 after 8 months.

4. Your brother borrowed from your neighbor to buy a new mobile phone. The
neighbor charged 11% for the borrowed amount payable after three years at a total
amount of Php7 000.

5. You deposited your savings from your daily allowance in a time deposit account
with your savings bank at a rate of 1.5% per annum. This will mature in 6 months
and you expect to get Php5 000 at the end of the term.

Activity 3: Amortized Me!

Direction: Prepare a loan amortization table for each scenario and compute for its
interest expense.
1. CM Company borrowed Php2 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 Php250 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, 2016 and
2017 with respect to this loan?

2. ESD borrowed Php5 million from a bank on September 30, 2015. The loan
principal is payable every six months starting March 31, 2016 at the rate of Php1 000
000. The loan has an annual interest rate of 10%. Determine the interest expense
related to this loan in 2015, 2016, 2017, and 2018.

Great job! You have understood the lesson. Are you now ready to summarize?

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 GAUGE

Direction: Read each item carefully. Use a separate sheet for your answers. Write the
letter of the best answer for each item.
1. It is the money that you have right now will be worth more over time.
A. future value
B. past value
C. present value
D. time value of money
2. What formula you are going to use if you put your money in the bank which earned
interest?
A. PV = FV / (1 + r)n
B. PV = FV (1 + r)n
C. FV = PV (1 + r)n
D. FV = PV / (1 + r)n
3. It is a type of loan with scheduled, periodic payments that are applied to both the
loan's principal amount and the interest accrued.
A. abandoned loan
B. amortized loan
C. depreciated loan
D. regular loan
4. How is the interest of an amortized loan calculated?
A. It is calculated based on the most recent beginning balance of the loan.
B. It is calculated based on the most previous ending balance of the loan.
C. It is calculated based on the most recent ending balance of the loan.
D. It is calculated based on the most recent beginning balance of the loan.
5. What formula you are going to use if you you need to save today to have a specific
amount at some point in the future.
A. PV = FV / (1 + r)n
B. PV = FV (1 + r)n
C. FV = PV (1 + r)n
D. FV = PV / (1 + r)n
6. In the formula of computing the future and present value of money, what is r?
A. equals how much he needs to have today
B. equals how much he will need in the future
C. equals the interest rate he/she will earn on the money
D. equals the number of periods before he needs the money

9
7. An amortized loan is the result of a series of _______________.
A. calculations
B. decisions
C. planning
D. performance
8. In the formula of computing the future and present value of money, what is n?
A. equals how much he needs to have today
B. equals how much he will need in the future
C. equals the interest rate he/she will earn on the money
D. equals the number of periods before he needs the money

For items 9-10. Prepare an amortization table and determine the interest expense
incurred.
9. Anton is about to graduate and he wants to buy a new electric bike. He
borrowed Php25 000 from a bank on March 31, 2018 at the rate of 6%. The loan is
paid at the rate of Php5 000 quarterly until the full amount is paid. Prepare an
amortization schedule and determine the interest expense incurred in 2018 and 2019
with respect to the loan.
10. Dannie need to buy a car, but she doesn’t have enough money to fully pay
for one. She decided to borrow from a bank worth Php1 800 000 at the rate of 7% a
year on June 30, 2016. The loan is paid at the rate of Php300 000 semi-annually.
Prepare an amortization schedule and determine its interest expense incurred in 2016,
2017, 2018, and 2019 related to the loan.

Well done! You are now ready for the next lesson!

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REFERENCES:
Printed Materials:

Borja and Cayanan (2017). Business Finance Applied Subject (pp 96-101; 104-106).
Rex Bookstore.

Websites:
Present and Future Value: Calculating the Time Value of Money
https://study.com/academy/lesson/present-and-future-value-calculating-the-time-
value-of-money.html

Future Value vs. Present Value

https://smallbusiness.chron.com/future-value-vs-present-value-77714.html

Introduction to the Time Value of Money

https://courses.lumenlearning.com/boundless-accounting/chapter/introduction-to-
the-time-value-of-money/

Amortized Loan
https://www.investopedia.com/terms/a/amortized_loan.asp

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KEY ANSWER
JUMPSTART
Pretest
1. D 2. C 3. B 4. C 5. A 6. C 7. A 8. D 9. B 10. D
EXPLORE
Activity 1: Find My Future Value!
1. Php20 224.8 2. Php1 609 120 3. Php25 335 4. Php9 573.2 5.Php5
037.5
DEEPEN
Activity 2: Find My Present Value!
1. Php16 019.94 2. Php397 732.92 3. Php24 669.43 4. Php5 118.46
5. Php4 962.78
Activity 3: Amortized Me!
1. Amortization Table for Php2-Million Loan
Amortization Payments Interest Principal Principal
Dates Payment Balance
2 000 000
September 30, 300 000 50 000 250 000 1 750 000
2015
December 31, 293 750 43 750 250 000 1 500 000
2015
March 31, 2016 287 500 37 500 250 000 1 250 000
June 30, 2016 281 250 31 250 250 000 1 000 000
September 30, 275 000 25 000 250 000 750 000
2016
December 31, 268 750 18 750 250 000 500 000
2016
March 31, 2017 262 500 12 500 250 000 250 000
June 30, 2017 256 250 6 250 250 000 -
Interest expense incurred in 2015 = Php93 750
Interest expense incurred in 2016 = Php112 500
Interest expense incurred in 2017 = Php18 750

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2. Amortization Table for Php5-Million Loan
Amortization Payments Interest Principal Principal
Dates Payment Balance
5 000 000
March 31, 2016 1 250 000 250 000 1 000 000 4 000 000
September 30, 1 200 000 200 000 1 000 000 3 000 000
2016
March 31, 2017 1 150 000 150 000 1 000 000 2 000 000
September 30, 1 100 000 100 000 1 000 000 1 000 000
2017
March 31, 2018 1 050 000 50 000 1 000 000 -

Interest expense incurred in 2015 = 0

Interest expense incurred in 2016 = Php450 000
Interest expense incurred in 2017 = Php250 000
Interest expense incurred in 2018 = Php50 000

GAUGE
1. D 2. C 3. B 4. C 5. A 6. C 7. A 8. D

9. Amortization Table for Php25 000 Loan

Amortization Payments Interest Principal Principal Balance
Dates Payment
25 000
June 30, 2018 5 375 375 5 000 20 000
September 30, 5 300 300 5 000 15 000
2018
December 31, 5 225 225 5 000 10 000
2018
March 31, 2019 5 150 150 5 000 5 000
June 30, 2019 5 075 75 5 000 -

Interest expense incurred in 2018 = Php900

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Interest expense incurred in 2019 = Php225

10. Amortization Table for Php1.8-Million Loan

Amortization Payments Interest Principal Principal Balance
Dates Payment
1 800 000
December 31, 363 000 63 000 300 000 1 500 000
2016
June 30, 2017 352 500 52 500 300 000 1 200 000
December 31, 342 500 42 500 300 000 900 000
2017
June 30, 2018 331 500 31 500 300 000 600 000
December 31, 321 000 21 000 300 000 300 000
2018
June 30, 2019 310 500 10 500 300 000 -

Interest expense incurred in 2016 = Php63 000

Interest expense incurred in 2017 = Php95 000
Interest expense incurred in 2018 = Php52 500
Interest expense incurred in 2019 = Php10 500

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