Time Value of Money

Time Value of Money Factors:

FUTURE VALUE (FV). The amount to which a cash flow or series of cash flows will grow over a given period of time when
compounded at a given interest rate.
PRESENT VALUE (PV). The value today of a future cash flow or series of cash flows discounted at a given interest rate.
With the use of
Formulas: Calculators

Future value of 1 (1 + i )n 1 + i xx =

Future value of an ordinary annuity of 1 (1 + i)n – 1 1 + i x x = -1 = ÷ i =

i

Future value of an annuity due of 1 FVOAf (1 + i)

Present value of 1 1 1+i ÷÷ =

(1 + i)n

Present value of an ordinary annuity of 1 1 1 + i ÷ ÷ = M+ MR

1 – (1 + i)n
i

Present value of an annuity due of 1 PVOA (1 + i)

Note: The number of times the equal (=) sign and the M+ are pressed depends on the number of periods involve.

Examples:
Future value of 1 for 3 periods compounded (1 + 25%)3 1 + 25% x x = =
at 25%
Answer: 1.953
Present value of 1 to be received after
3 periods discounted at 25% 1 1 + 25% ÷ ÷ = = = =
(1 + 25%)3
Answer: 0.512

Annuity is a series of equal peso payments for a specified number of years. There are two basic types of annuities:
a) Ordinary annuity – an annuity in which the payments occur at the end of each period.
b) Annuity due – an annuity in which the payments occur at the beginning of each period.

You are encourage to answer the

Sample Questions following questions. We will discuss
the answers next meeting.
Present Value of 1
1. What is the present value of ₱25,000 received after 5 years discounted at 10%?

2. An investor would like to have ₱1,000,000 after 20 years. How much should he invest today if he expects to earn
12% on the average?

3. The Atendido Corporation promised Majera a ₱200,000 retirement bonus at the end of 15 more years of service.
Assume 10 percent is the best interest rate Majera can earn on her long-term savings. What is the present value
of the retirement bonus?

Present Value of the Ordinary Annuity of 1

4. What is the present value of ₱7,000 to be received at the end of each 20 periods, discounted at 5% interest?

5. What is the present value of six receipts of ₱10,000 each to be received at the end of each period, discounted at
9%?
6. You are preparing for your expenses for your formal review. You plan to deposit ₱5,000 in a bank which will
earn 6 percent interest at the end of each year for three years. What is the present value of your planned deposits?
Present Value of Annuity Due
7. What is the present value of ₱7,000 due 8 periods hence, discounted at 11%?

8. What is the present value of 20 periodic payments of ₱4,000 each made at the beginning of each period and
discounted at 8%?

9. Space Odyssey, Inc. rents a communication satellite for 4 years with annual rental payments of ₱4.8 million to
be made at the beginning of each year. If the relevant interest rate is 12%, what is the present value of the rental
obligations?

Future Value of 1
10. What is the future value of ₱7,000 at the end of 5 periods at 8% compounded interest?

11. Sarah has decided to keep her Christmas bonus of ₱20,000 in a time deposit which is expected to earn 10% on
the average. How much would it amount to after ten years?

12. If Rexie deposits ₱100,000 in a savings account at a bank at 12% interest, how much will he accumulate in the
account in 7 years if no withdrawals are made, and if interest is compounded semiannually?

Future Value of the Ordinary Annuity of 1

13. What is the future value of 15 periodic payments of ₱7,000 each made at the end of each period and compounded
at 10%?

14. Hightown Electronics decides to deposit ₱75,000 at the end of each 6-month period for the next 3 years for the
purpose of accumulating enough money to meet debts that mature in 3 years. What is the future value that will
be on deposit at the end of 3 years if the annual interest rate is 10%?

15. Anisa plans to invest ₱10,000 at the end of each year in a fund. To what amount will the investment grow in 3
years if the fund earns 8% annual interest compounded semiannually?

Future Value of Annuity Due

16. What is the future value of 15 deposits of ₱2,000 each made at the beginning of each period and compounded at
10%?

17. You are planning to deposit ₱5,000 in a savings account at beginning of each period that earns an interest of 5%
per annum, compounded semiannually. How much would you have after 10 deposits?

18. Juana Narciso plans to deposit ₱5,000 a year on each birthday of her son, Harold, starting today, his tenth birthday
at 12% interest compounded annually. Juana wants to know how much she will have accumulated for college
expenses by her son’s eighteenth birthday.