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CENTRAL PHILIPPINE UNIVERSITY

Jaro, Iloilo City 5000, Philippines

COLLEGE OF BUSINESS AND ACCOUNTANCY

DEPARTMENT OF BUSINESS ADMINISTRATION

MODULES

IN

FIN 2101 FUNDAMENTALS OF FINANCIAL MANAGEMENT

REVISION NO. 0

Effective Summer 2020

Prepared by: MA. ROSALENE J. MADERO, Ed. D.

Professor

Checked by: NELIA G. BONETE, M.B.A.

Chairperson
Department of Business Administration

Approved by: LORNA T. GRANDE, Ph.D.

Dean
College of Business Administration and Accountancy

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
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CENTRAL PHILIPPINE UNIVERSITY

Jaro, Iloilo City 5000, Philippines

DEPARTMENT OF BUSINESS ADMINISTRATION

COLLEGE OF BUSINESS AND ACCOUNTANCY

MODULES IN FIN 2101: FUNDAMENTALS OF FINANCIAL MANAGEMENT

Course Code: Fin 2101

Course Title: Fundamentals of Financial Management

Course Description: This course is an introduction to financial management, an application of financial analysis
tools in valuing bonds and stocks and the risks associated with valuation; capital budgeting
techniques, cash flow estimation and risks in capital budgeting; managing working
capital, cash and financing, corporate financial planning, and other concerns related to the
financial policies of the firms.

Pre-requisite: Acctg 1205, GE Math 1 World

Credit: 3 units Lecture: 3 units

Class Schedule: Lecture: 3 hours per week Time: Day: Room:

Instructor:
Name: Ma. Rosalene J. Madero
Office: Department of Business Administration Room: OV 109 Tel No. 329 1971 local 1070
Consultation Schedule: Time: Day: Room:

Other Teacher(s) teaching the course:

Name: Lucio T. Encio, Ph.D.
Office: Department of Business Administration Room: OV 109 Tel No. 329 1971 local 1070
Consultation Schedule: Time: Day: Room:

Course Coordinator:
Name: Prof. Jonathan J. Razon
Consultation Schedule: Time: Day: Room:

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 3 of 12

MODULES IN FIN 2101 FUNDAMENTALS OF FINANCIAL MANAGEMENT

MODULE 6 –TIME VALUE OF MONEY ANALYSIS OR TVMA (WEEKS 8 – 10)

MODULE 6 OUTLINE:

0. Objectives/Learning Outcomes of Module 6

1. Making Capital Outlay Decisions
2. Future Value with a Single Amount or Future Value of P1
3. Future Value with Several Amounts (Ordinary Annuity)
4. Future Value with Several Amounts (Annuity Due)
5. Present Value with a Single Amount or Present Value of `P1
6. Present Value with Several Amounts (Ordinary Annuity)
7. Present Value with Several Amount (Annuity Due)
8. Perpetuities
9. Present Value of Complex Streams
10. Future Value of Uneven Cash Payment or Receipts (Cash Flows)
11. Varied Compounding Periods
12. Particular Usages of TVMA

MODULE 6 PROPER:

M6-0. Objectives/Learning Outcomes of Module 6

After finishing Module 6, the student is able to:

0.1 explain fully the basic concepts involving the time value of money;

0.2 discuss fully the use and implications of the time value of money to financial management and
company as a whole;

0.3 explain fully and synthesize the concepts involving present value of money;

0.4 discuss and synthesize the concepts involving future value of money;

0.5 apply the different mathematical models in analyzing time value of money; and

0.6 interpret the results in computing time value amounts.

M6-1. Making Capital Outlay Decisions

Financial managers may need to evaluate and assess new project proposals or do “buy-or-
lease” decisions. These decisions entail capital outlays on the part of the firm. As a primary step in
making decisions involving capital outlay, the financial manager should use mathematical tools of
the time value of money analysis (TVMA).

An important TVMA concept one must keep in mind is that in making financial decisions
that involves comparing two amount of different time periods, both amounts must first be converted
into the same time value. This means that if we compare one amount pegged from a current and
one amount pegged from a future value, both amounts must first be valued at the same period
Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
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before they can be correctly compared. This is no sense in comparing a present valued amount to a
future valued amount.

M6-2. Future Value with a Single Amount or Future Value of P1

The P1 you have today is worth more than P1 that you would receive a year from now. This
is because if you have P1 now and invest it, you would receive more than just P1 after a year.
When a firm is to receive or pay something once in the future, the future value of a single amount or
the future value of P1 is computed.

Illustrative Example:

Assume that on January 1, 2020, Gabriel invested P100,000 in a financing company.

He would like to find out what would be the worth of his P100,000 after 5 years with an
interest rate pegged at 8% per annum.

Solution:

2.1 Itemized Method

Table of Computation

December 31, 2020 P100,000 x 1.08 P108,000

December 31, 2021 P108,000 x 1.08 116,640
December 31, 2022 P116,640 x 1.08 125,971
December 31, 2023 P125,971 x 1.08 136,049
December 31, 2024 P136,049 x 1.08 146,933

2.2 Mathematical Model Method

The basic formula to compute the future value is:

FV = PV (1 + i) n

Where: FV = future value of an amount

n = number of periods

PV = present value of an amount

i = interest rate

If we apply the formula for Gabriel’s query,

FV = P100,000 (1 + .08)5

= P100,000 (1.08)5

= 146,933.00

2.3 Using Interest Tables (Tabular Method)

Using the table of Future value interest factor of P1 per period for n periods,
get the factor after having juxtaposed 8% and 5 years. You will obtain 1.469.
multiply this with P100,000 and you will get P146,900:

FV = P100,000 x 1.469
Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
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= P146,900.00

M6-3. Future Value with Several Amounts (Ordinary Annuity)

If we are to receive P1 million in 5 years, and we will receive the whole amount on
staggered basis, that means we will receive P200,000 each year for the next 5 years. Thus, we need
to compute the future value of several equal amounts (P200,000) annually for the next five years.

Illustrative Example:

Assume that on Enzo Company is to make an annual investment of P200,000 for

four years. The interest was pegged at 9%. The investment is made every year-end. What
is the future value of this annuity?

Solution:

3.1 Long Method

Table of Computation

Period Amount Invested FV Factor of P1 Future Value

December 31 – 4th year 200,000 1.00 P200,000
December 31 – 3rd year 200,000 1.09 218,000
December 31 – 2nd year 200,000 1.881 237,620
December 31 – 1st year 200,000 1.2950 259,000
FV Annuity 4.5731
Factor
Future Value 914,620
Annuity

3.2 Short Method:

Amount of investment yearly – P200,000

FV Annuity Factor – juxtaposed 9% and 4 years = 4.5731

FV Annuity = 914,620.00

3.3 Mathematical Model Method

FV Annuity = PV [ (1 + i) n – 1 / i]

Where: FV = future value of an amount

n = number of periods

PV = present value of an amount

i = interest rate

If we apply the formula for Enzo,

FV = P200,000 [ 1 + .09)4 – 1]

= P914,620

M6-4. Future Value with Several Amounts (Annuity Due)

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
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Let us assume that Enzo will annual investment of P200,000 for four years. The interest is
9%. The investment is made at the beginning of each year. What is the future value of this annuity
due?

Solution:

3.1 Long Method

Table of Computation

Period Amount Invested FV Factor of P1 Future Value

January 1 – 4th year 200,000 1.09 P 218,000
January 1 – 3rd year 200,000 1.1881 237,620
January 1 – 2nd year 200,000 1.2950 259,000
January 1 – 1st year 200,000 1.4116 282,320
FV Annuity 4.9847
Factor
Future Value P 996,940
Annuity

3.2 Short Method:

Amount of investment yearly – P200,000

FV Annuity Factor – juxtaposed 9% and 4 years = 4.4987

FV Annuity = 996,940.00

M6-5. Present Value with a Single Amount or Present Value of `P1

The present value is the opposite of the future value.

Formula: PVn = FV [ 1 / (1 + i )n ]

Assume that Tia Corporation would like to know the amount of investment it will
make in order to yield P100,000 which it will receive three years from now. The discount
rate is 25%.

Table of Computation
(Future Value of P1 in 3 years)
Period Computation Future Value of P1
After first year P 1.00 x 1.25 P 1.25
After second year P 1.25 x 1.25 P1.5625
After third year P1.5625 x 1.25 P1.9531

PV Factor = present value / future value

= P1.0 / P1.9531 = 0.512

PV = 100,000 x 0.512 = P51,200.

The present value of P100,000 is P51,200.00. Tia will invest P51,200 now to
be able to receive P100,000 after three years.

M6-6. Present Value with Several Amounts (Ordinary Annuity)

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 7 of 12

In finding the present value of the ordinary annuity, you merely reverse the treatment of the
future value of an ordinary annuity. The present value of an ordinary annuity is the sum of all the
present values of P1 in a series of amount that you will receive or pay at the end of each year in the
future.

Formula:

Present value of Ordinary Annuity = Series of future value of amounts to be received

or paid x PV of Ordinary Annuity Factor.

Example:

Assume that on January of the current, Kent Corporation sold its equipment costing
P500,000 for P800,000 to Vin Corporation. Vin paid P200,000 as down payment and the
balance will be paid with a non-interest bearing note for P600,000. The note shall be paid in
equal annual installments every year end amounting to P200,000 per year. The interest rate
of this type of note is 10%. You have been tasked by Kent Corporation on the present value
of the note receivable to be recognized by the firm.

6.1 Long Method

Table of Computation

Period Series of future PV Factor of P1 Present Value

values to be at 10% of P1 for each
received by Kent amount
Year-end – 1st year 200,000 0.9091 P181,820
Year-end – 2nd year 200,000 0.8264 165,280
Year-end – 3rd year 200,000 0.7513 150,260
PV of Ordinary 2.4869
Annuity Factor
Present Value of 497,360
Ordinary Annuity

6.2 Short Method:

Amount of investment yearly – P200,000.00

PV of Ordinary Annuity = Series of futures values of amounts to be received or

paid x PV of Ordinary Annuity Factor

= P200,000 x 2.4869

= P497,380.00

M6-7. Present Value with Several Amount (Annuity Due)

In finding the present value of an annuity of due, you merely reverse the treatment for the
future value of an annuity due. The present value of annuity due is similar to ordinary annuity. The
only difference is that in annuity due, the period on which amounts are received or paid is at the
beginning of the year. The present value of annuity due occurs when you would like to determine
the present value of a series of amounts you will receive or pay in the future.

Formula:

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 8 of 12

Present value of Ordinary Annuity = Series of future value of amounts to be received

or paid x PV of Ordinary Annuity Factor.

Example:

Assume that on January of the current, Kent Corporation sold its equipment costing
P500,000 for P800,000 to Vin Corporation. Vin paid P200,000 as down payment and the
balance will be paid with a non-interest bearing note for P600,000. The note shall be paid in
equal annual installments at the beginning of every year amounting to P200,000 per year.
The interest rate of this type of note is 10%. You have been tasked by Kent Corporation on
the present value of the note receivable to be recognized by the firm.

7.1 Long Method

Table of Computation

Period Series of future PV Factor of P1 Present Value

values to be at 10% of P1 for each
received by amount
Kent
Beginning of year– 1st year 200,000 1.000 P181,820
Beginning of year – 2nd year 200,000 0.9091 165,280
Beginning of year – 3rd year 200,000 0.8264 150,260
PV of Ordinary
Annuity Factor 2.7355
Present Value of
Ordinary 547,100
Annuity

7.2 Short Method:

Amount of payment yearly – P200,000.00

PV of Annuity Due = Series of futures values of amounts to be received or

paid x PV of Annuity Due Factor

= P200,000 x 2.4869

= P547,100.00

M6-8. Perpetuities

Perpetuities are annuities that may go indefinitely.

Formula:

PV Perpetuity = Payment / Interest Rate

Example:

Assume that the Philippine government sold small-denominated bonds in 1980.

Assume that that bonds remain floating up to the present. In 2018, the government sold
Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 9 of 12

huge amount of bonds to pay off the smaller bond issues they made in the 80’s. The purpose
of issuing the huge amount of bonds is to consolidate the government’s past debts due to the
smaller bonds issued. Assume that each consolidation promised to pay P100,000 per year
perpetually. How much would each bond be worth if the discount rate is 10% per annum?
15% per annum? 20% per annum.

Solution:

10% PV perpetuity = P100,000 / 10% = P1,000,000

15% PV perpetuity = P100,000 / 15% = 666,667

20% PV perpetuity = P100,000 / 20% = 500,000

Note: There is an indirect proportional relationship between the interest rate and the
PV perpetuity.

M6-9. Present Value of Complex Streams

The investment proposals or payments may involve uneven amounts of cash flows. For
instance, investment in securities would not necessarily yield uniform dividend income per year, or
investment in property, land and equipment would not normally yield constant inflows or receipts of
cash per year. Sometimes, the payments/receipts may involve uneven cash flows in the first three
years and from 4th year to the succeeding year an annuity of an even cash flow is paid or received.

Example:

Assume the following annual payments of notes payable of Blanco Corporation with
8% discount rate.

Table of Computation

Period Series of future PV Factor of P1 Present Value

values to be paid at 8% of P1 for each
by Blanco Corp. amount
1st
year 200,000 0.9259 P185,180
2nd
year 250,000 0.8573 214,325
3rd
year 300,000 0.7938 238,140
4th
year 375,000 0.7350 275,625
Total present value of uneven cash flows P913, 270

M6-10. Future Value of Uneven Cash Payment or Receipts (Cash Flows)

The future value of an uneven cash payment/receipt is sometimes referred to as terminal

value. This can be computed by compounding each payment/receipt each year and adding all the
future values.

Example:
Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 10 of 12

Assume that Rose Corporation is to make an investment of uneven cash payments

for four years. The interest was pegged at 9% and the investment is made every year-end.
What is the future value of this annuity? Consider the data below:

Period Present Value of P1 for each amount

December 31 – 4th
year P200,000
December 31 – 3rd
year 250,000
December 31 – 2nd
year 300,000
December 31 – 1st
year 325,000

Table of Computation

Period Amount Invested FV Factor of P1 Present Value

at 9% of P1 for each
amount
December 31 – 4th
year 200,000 1.00 P200,000
December 31 – 3rd
year 250,000 1.09 272,500
December 31 – 2nd
year 300,000 1.1881 356,430
December 31 – 1st
year 375,000 1.2950 420,875
Total future value of cash flows P1,249,805

M6-11. Varied Compounding Periods

The examples presented so far involved compounding or discounting interest rates annually.
However, there are financial contracts like acquisitions or installment basis or corporate bond
contracts that may require semi-annual, quarterly, or monthly compounding periods.

Under this situation, we compute:

Period = number of years x 2 (semi-annually)

Period = number of years x 4 (quarterly)

Period = number of years x 12 (monthly)

Interest = interest rate / 2 (semi-annually)

Interest = interest rate / 4 (quarterly)

Interest = interest rate / 12 (monthly)

Example:

Find the future value of Sofie Corporation with a P100,000 investment. The
investment is good for five years with 6% annual interest. Assume that the investment is
compounded semi-annually.

Solution:

Period = 5 x 2 = 10

Interest = 6% / 2 = 3%

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 11 of 12

In computing for the future value factor (FVF), you will be using 3% and the
period is not 5 periods but 10 periods. Based on the new period and interest rate,
FVF is 10.78.

Future value = P100,000 x 10.78

= P1,078,000

M6-12. Particular Usages of TVMA

12.1 Compounding interest more regularly than a year.

Example:

Assume that at the beginning of the calendar year 2017, Nico Corporation has
the opportunity to deposit P100,000 in a savings account that has a nominal interest
of 12% which compounded semi-annually. Consider the matrix below showing the
future value from depositing P100,000 at 12% interest compounded semi-annually
over 2 years.

Table of Computation
Future Value at 12% Compounded semi-annually
Period Principal FV Factor of P1 Present Value
at 9% of P1 for each
amount
January 1 – June 30
100,000.00 1.06 P106,000.00
July 1 - December 31
106,000.00 1.06 112,360.00
January 1 – June 30
112,360.00 1.06 119,101.60
July 1 - December 31
119,101.60 1.06 126,247.70

12.2 Computation of Effective Interest Rate:

In assessing returns of investments or loan values, it is important for firms to

have a common basis for comparing interest rates. To do so, it is critical that we
understand the two types of interest rates:

12.2.1 nominal rate (NR) – rate stated in the contract of loan or investment.

12.2.2 effective rate (EF) – the rate that is actually paid by the borrower or
actually received or earned by the investor.

12.3 Determining accumulated annual deposits for funds.

There are times when management may want to determine the amount of
annual deposit it needs in order to accumulate a certain amount of cash in the future.

Example:

Assume that Titan Corporation would like to acquire a land and building 5
years from now and it was estimated that the initial boot to pay is P4,000,000. The
firm may opt to deposit equal amount every year-end while paying interest per
annum of 8%. Titan must find out the size of annuity that would come out with a
consolidated amount of P4,000,000 on the 5th year. The amount can be computed by
employing the future value of an ordinary annuity.
Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty
 Page 12 of 12

Formula:

Sn = A, T2 (i, n)

Where:

Sn = the amount to be accumulated

A = is the annual deposit

T2 = (i, n) = interest rate, number of days

A formula to compute annual deposit may be derived to compute from the

formula above:

A = Sn / (1 + 1)n – 1

A = 4,000,000 / 5.8667 = 681,814.

Titan needs to deposit P681,814.00 every year for five years to accumulate
P4,000,000 for its land and building acquisition.

12.4 Loan Amortization.

When a loan is made, it could that such loan can be paid on an equal staggered basis
until said loan is fully paid.

Formula:

Amortization Payment = borrowed amount / PV of Annuity

Example:

Enzo Corporation loaned P4,000,000 for 4 years with an interest pegged at

11%. What is the amount of amortization to be done by Enzo to fully the loan?

Solution:

Amortization Payment = 20,000,000 / 3.1024

= P6,446,621

This means the Enzo would need to annually pay P6,446,621 to pay off the
loan of P20,000 after 4 years.

Date of Effectivity: Rev. No. 0 Prepared by: Checked by: Approved by:

Summer 2020 Revision Date: NELIA G. BONETE, M.B.A. LORNA T. GRANDE, Ph.D.
June 2020 MA. ROSALENE J. MADERO Chairperson, Dept. of Bus Adm Dean, College of Bus & Accty