This concept speaks that the value of a million you have now is not the same as a million ten

years ago or ten

years later.

Interest is an amount of money paid as compensation for what can be earned by the use of the money.

Time Value of Money Calculation

• Fixed Interest
• Future Value or Compound Value
• Present Value
• The Value of Annuity
• Perpetuity
• The compounding/discounting period is not annual

Fixed Interest

I = PV.n.i

FV = PV+I

= PV + (PV.n.i)

= PV (1 + n.i)

l = Overall interest magnitude

PV = Loan amount (current value)

n = Number of years/month

i = Interest rate

FV = Amount payable(future value)

future Value (FV)

FVn = PV (1+i)n

FVn = PV (FVIF, i,n)

FVn
PV =
Present Value (PV) (1 + i ) n

Annuity

is a row of receipts or payments of a fixed amount of money over a certain period of time. If receipts or payments
occur at the end of each period then it is called ordinary annuity. at the beginning of each period is annuity due.

Ex: The Company will repay a loan of IDR 2,000,000.00 in 5 years at the end of each consecutive year with an
interest rate of 15%, but the payment will be made at the end of the 5th year. What is the compound sum?
n
FVAn = PMT  (1 + i ) n −t
t =1

FVAn = Future Value Annuity

PMT = receipt or payment

k = interest rate

n = time period
FVAn = PMT (FVIFA, k,n)


Sn = PMT (1 + i ) n −1 + (1 + i ) n − 2 + ......+ (1 + i ) n −t 

The bank will offer the company Rp 2,000,000.00 per annum received at the end of the year with an interest
set at 15% per annum. So what is the present value of a number of receipts for 5 years?
t
n
 1 
PVA = PMT   
t =1  1 + i 

PMT PMT PMT

An = + + ......+
(1 + i) (1 + i)
1 2
(1 + i) n

2.000.000 2.000.000 2.000.000

An = + + ......+
(1 + 0.15) 4
(1 + 0,15) 3
(1 + 0,15)0

Annuity Due:

Future Value = FVAn (due) = PMT (FVIFA,k,n) (1+i)

Present Value = PVA (due) = PMT (PVIFA, k,n) (1+i)

Perpetuity Is an annuity that lasts for an infinite period of time. Its characteristics: it is infinite and the number is
fixed. Formula formula: PV (perpetuity) = PMT/i
Where: PMT = payment i = interest rate or discount rate Cat: PMT and i must be the same time period.
If PMT is annually, then k is also the interest rate per year.

Compounding/Discounting period is not annual Can be daily, weekly, monthly, or semi-yearly. The shorter the
compounding period, the more profitable the saver or investor is, because interest is immediately received and
can be reinvested. FVn = PV (1 +iNom/m)m.n

Where: iNom = nominal interest rate/year m = number of times interest is paid in 1 year n = period (in years)

FVn
PV =
For present value:
(1 + k Nom / m ) m.n

Effective Annual Rate (EAR) It is the interest rate that produces the same value as the annual compounding or
the annual interest rate that is actually enjoyed by investors. EAR = (1+iNom/m)m -1

Amortized Loan is the debt paid back in the same amount periodically over time. And interest is calculated from
the balance of the debt (remaining debt). PVA = PMT (PVIFA, k,n)

PVA
PMT =
PVIFA, k , n