Time Value of

z
Money
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TOPICS:

▪ BASIC ABOUT TIME VALUE OF MONEY

▪ CONCEPTS OF PRESENT VALUE AND FUTURE VALUE

▪ ANNUITIES
➢ Ordinary Annuity

➢ Annuity Due

➢ Future Value (Ordinary Annuity and Annuity Due)

➢ Present Value (Ordinary Annuity and Annuity Due)

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Principle of Time Value of Money

▪ The idea that money available at the present time is

worth more than the same amount in the future due
to its potential earning capacity

▪ The time value of money says that a “ A PESO

received TODAY is worth MORE than a PESO
received TOMORROW”

▪ A peso received today can be INVESTED to earn

interest.
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Present Value vs. Future Value

PRESENT VALUE
The current worth of a money or stream of
cash flows given a specified rate of return

FUTURE VALUE

The value of an asset or cash at a specified

date in the future that is equivalent in value to
a specified sum today
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Present Value vs. Future Value

At the beginning PRESENT VALUE FUTURE VALUE

of the year,
P2,000.00 was
invested at a
deposit account P2,000.00
P2,160.00
earning 8%
annually. How
much will the
Future Value = Initial Value x (1 + R)T
deposit be after
a year? FV = P2,000.00 x (1 + 0.08)1
FV = P2,000.00 x 1.08
FV = P2,160
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Exercise:

▪ At the beginning of the year, A2z invested P500,000 in a certificate of

deposit for two years at 10% interest per annum. What will be the value of
the said invested at the end of the year?

Answer:

FV = P500,000 x (1 + 0.10 )2

FV = P500,000 x (1.10)2

FV = P500,000 x 1.21

FV = P605,000
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Present Value vs. Future Value

At the beginning PRESENT VALUE FUTURE VALUE

of the year, a
deposit account
earning 8%
annually P2,000.00
P2,160.00
amounted to
P2,160.00. How
much was
Present Value = Future Value
deposited at the (1 + R)T
beginning of the
PV = P2,160.00 / (1 + 0.08)1
year?
PV = P2,160.00 / 1.08
PV = P2,000.00
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Exercise:
▪ At the beginning of the year, A2z invested in a certificate of deposit for two
years at 10% interest per annum. At the end of the year, A2Z will receive a
total amount of P605,00.00. What could have been the amount invested
by A2Z at the beginning of the year?

Answer:

PV = P605,000 / (1 + 0.10 )2

PV = P605,000 / (1.10)2

PV = P605,000 / 1.21

PV = P500,000
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Present Value vs. Future Value

PRESENT VALUE FUTURE VALUE

INTEREST
P2,000.00 P160.00 P2,160.00
Difference between PV and FV
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Present Value vs. Future Value

Therefore, the difference between the two values depends on two factors:

➢ The greater the rate, the larger the

interest, and as a result, the future
INTEREST RATE
value

TIME ➢ The longer the money is left in the

account, the more interest it gains.
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ANNUITIES

Series of periodic payments (or receipts), usually

made in equal amounts. The payments are
computed by the compound interest method and
are made at equal intervals of time, such as
annually, semi-annually, quarterly, or monthly.
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CLASSIFICATION OF ANNUITIES

▪ Ordinary Annuity

➢ periodic payments are made at the end of

each payment interval.

▪ Annuity Due

➢ periodic payments are made at the

beginning of each payment interval.
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Sample Test:
Ordinary Annuity
On January 1,2021, A2Z
Company arranged to invest in
an account that will earn 12%
interest compounded annually.
The investment is for 3 years
ending December 31, 2023. A2Z
company plans to deposit
P100,000.00 each years for 3
years or a total of P300,000.00,
beginning December 31, 2021
and every December 31 thereof.
Annuity Due
On January 1,2021, A2Z
Company arranged to invest in
an account that will earn 12%
interest compounded annually.
The investment is for 3 years
ending December 31, 2023. A2Z
company plans to deposit
P100,000.00 each years for 3
years or a total of P300,000.00,
beginning January 1, 2021 and
every January 1 thereof.
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Sample Test:
Ordinary Annuity
On January 1,2021, A2Z
Company arranged to invest in
an account that will earn 12%
interest compounded annually.
The investment is for 3 years
ending December 31, 2023. A2Z
company plans to deposit
P100,000.00 each years for 3
years or a total of P300,000.00,
beginning December 31, 2021
and every December 31 thereof.
Annuity Due
On January 1,2021, A2Z
Company arranged to invest in
an account that will earn 12%
interest compounded annually.
The investment is for 3 years
ending December 31, 2023. A2Z
company plans to deposit
P100,000.00 each years for 3
years or a total of P300,000.00,
beginning January 1, 2021 and
every January 1 thereof.
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FUTURE VALUE OF ORDINARY ANNUITY
▪ On January 1,2021, A2Z Company arranged to invest in an account that will earn 12%
interest compounded annually. The investment is for 3 years ending December 31,
2023. A2Z company plans to deposit P100,000.00 each years for 3 years or a total of
P300,000.00, beginning December 31, 2021 and every December 31 thereof. How
much balance will the investment have on December 31, 2023?
Jan. 1 Dec. 31 Dec. 31 Dec. 31
2021 2021 2022 2023

P100,000 x 1.12 P112,000

100,000
P212,000 x 1.12 P237,440
P100,000
Answer: P337,440
P337,440
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The FV of Ordinary Annuity Formula

FVOA = Pmt x (1 + i) n -1
i

FVOA = Future value of ordinary annuity

Pmt = Annuity payment

I = interest rate per period

N = number of compounding periods

 z Solution:
Example
FVOA = Pmt x (1 + i) n -1
On January 1,2021, A2Z i
company arranged to invest in
an account that will earn 12%
FVOA = P100,000 x (1+0.12)3 – 1
interest compounded annually.
The investment is for 3 years
0.12
ending December 31, 2023.
A2Z plans to deposit P100,000 FVOA = P100,000 x 1.404928 – 1
each year for 3 years or a total 0.12
of P300,000, beginning
December 31, 2021 and every FVOA = P100,000 x 0.404928
December 31 thereof. How 0.12
much balance will the
investment have on December
FVOA = P100,000 x 3.3744
2023?

FVOA = 337,440.00
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FUTURE VALUE OF ANNUITY DUE
▪ On January 1,2021, A2Z Company arranged to invest in an account that will earn 12%
interest compounded annually. The investment is for 3 years ending December 31,
2023. A2Z company plans to deposit P100,000.00 each years for 3 years or a total of
P300,000.00, beginning January 1, 2021 and every January 1 thereof. How much
balance will the investment have on December 31, 2023?
Jan. 1 Dec. 31 Dec. 31 Dec. 31
2021 2021 2022 2023

P100,000 x 1.12 P112,000

100,000 ( Jan. 1, 2022)

P212,000 x 1.12 P237,440

P100,000 ( Jan. 1, 2023)
P337,440 x 1.12 P 377,932.80
Answer: P377,932.80
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The FV of Annuity Due Formula

FVAD = Pmt x (1 + i) n -1
X (1+ i)
i

FVAD = Future value of annuity due

Pmt = Annuity payment

I = interest rate per period

N = number of compounding periods

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Example
On January 1,2021, A2Z
FVAD = Pmt x (1 + i) n -1
company arranged to invest in X (1+ i)
an account that will earn 12% i
interest compounded annually.
The investment is for 3 years
FVAD = P100,000 x (1+0.12)3 -1
ending December 31, 2023. X (1 + 0.12)
0.12
A2Z plans to deposit P100,000
FVAD = P100,000 x 1.404928 -1 X (1 + 0.12)
each year for 3 years or a total 0.12
of P300,000, beginning January
FVAD = P100,000 x 0.404928 X (1 + 0.12)
1, 2021 and every January 1 0.12
thereof. How much balance will
FVAD = P100,000 x 3.3744 x 1.12
the investment have on
December 2023? FVAD = P100,000 x 3.77928
FVAD = 377,932.80
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ORDINARY
ANNUITY

VS

ANNUITY
DUE
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Present Value of Ordinary Annuity

You want to receive P50,000 annually for the next three years. How much
must b deposited now, at 9% compounded annually to yield an annuity
payment of P50, 000 at the end of each year, for 3 years?
 z Present Value of Ordinary Annuity
PVOA = Pmt x 1 – [1 ÷ (1 + I )n ]
i
You want to receive
PVOA = P50,000 x 1 – ( 1 ÷ 1.093 )
P50,000 annually for the 0.09
next three years. How PVOA = P50,000 x 1 – ( 1 ÷ 1.295029)
much must b deposited 0.09

now, at 9% compounded PVOA = P50,000 x 1 – 0.772183

annually to yield an 0.09

annuity payment of P50, PVOA = P50,000 x 0.227817

0.09
000 at the end of each
year, for 3 years? PVOA = P50,000 x 2.5313

PVOA = P126,565.00
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PRESENT VALUE OF Ordinary Annuity
You want to receive P50,000 annually for the next three years. How much must b
deposited now, at 9% compounded annually to yield an annuity payment of P50, 000 at
the end of each year, for 3 years?

Year Year Year Year

0 1 2 3

P126,565 x 1.09 P137,955.58

(P50,000)
P87,955.85 x 1.09 P95,871.88
(P50,000)
P45,871.88 x 1.09 P50,000
(P50,000)
0
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PRESENT VALUE OF ANNUITY DUE
On January 1, 2021, ACC arranged to invest in an account that will earn 12% interest
compounded annually. The investment is for 3 years. ACC wishes to withdraw
P100,000 each year for 3 years, beginning January 1, 2021 and every January 1
thereof. How much should the investment have on January 1, 2021
Jan. 1 Year Year Year
2021 1 2 3

?
(P100,000) (P100,000) (P100,000)
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THE PV OF ANNUITY DUE FORMULA

PVAD = Pmt x 1 – [ 1 ÷ ( 1+I ) n-1 ] + 1

i

PVAD = Present value of annuity due

Pmt = Annuity payment
I = interest rate per period
N = number of compounding periods

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On January 1, 2021, ACC
arranged to invest in an
account that will earn 12%
interest compounded
annually. The investment is
for 3 years. ACC wishes to
withdraw P100,000 each
year for 3 years, beginning
January 1, 2021 and every
January 1 thereof. How much
should the investment have
on January 1, 2021
PVAD = Pmt x 1 – [ 1 ÷ ( 1+I ) n-1 ] + 1
PVAD = P100,000 x { 1 – [ 1 ÷ ( 1 + 0.12 ) 3-1} + 1
0.12
.
PVAD = P100,000 x { 1 – [ 1 ÷ ( 1.12 ) 2} + 1
0.12
PVAD = P100,000 x { 1 – [ 1 ÷ (1.2544 )} + 1
0.12
PVAD = P100,000 x ( 1 – ( 0.797194) + 1
0.12
PVAD = P100,000 x 0.202806 + 1
0.12
PVAD = P100,000 x 1.69005 + 1
PVAD = P100,000 x 2.69005
PVAD = P269,005
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PRESENT VALUE OF ANNUITY DUE
On January 1, 2021, ACC arranged to invest in an account that will earn 12% interest
compounded annually. The investment is for 3 years. ACC wishes to withdraw
P100,000 each year for 3 years, beginning January 1, 2021 and every January 1
thereof. How much should the investment have on January 1, 2021
Jan. 1 Year Year Year
2021 1 2 3

P269,005.10
(P100,000) (P100,000) (P100,000)
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PRESENT VALUE OF ANNUITY DUE
On January 1, 2021, ACC arranged to invest in an account that will earn 12% interest
compounded annually. The investment is for 3 years. ACC wishes to withdraw
P100,000 each year for 3 years, beginning January 1, 2021 and every January 1
thereof. How much should the investment have on January 1, 2021
Jan. 1 Year Year Year
2021 1 2 3

P269,005.10 P 189,285.60 P100,000

(P100,000.00) (P100,000.00) (P100,000)
P 169,005.00 P 89,285.60
x 1.12 x 1.12 P0
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Equal Principal Repayments
On July 1, 2018, CC Company borrowed P3,000,000 from ASC
bank at the rate of 10% interest a year. The loan is paid at the rate
of P500,000 every December 31 and June 30 until the full amount
is paid.

Principal
Amortization Dates Payments Interest Payments Principal Balance
3,000,000.00
December 31, 2018 650,000.00 150,000.00 500,000.00 2,500,000.00
June 30, 2019 625,000.00 125,000.00 500,000.00 2,000,000.00
December 31, 2019 600,000.00 100,000.00 500,000.00 1,500,000.00
June 30, 2020 575,000.00 75,000.00 500,000.00 1,000,000.00
December 31, 2020 550,000.00 50,000.00 500,000.00 500,000.00
June 30, 2021 525,000.00 25,000.00 500,000.00 -
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Equal Regular Payments (Principal and
Interest Combined)

C = Present Value of an Annuity

PVIFA

A couple plan to purchase a house worth P3,000,000. Assuming you incur a 10-year
loan that is repaid in equal annual installment with an interest rate of 10%. What is the
annual mortgage payment?

C = P3,000,000
6.1446

C = 488, 233.57
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