TIME VALUE OF MONEY

Presented:

NIÑA GLORIA Z. PENDANG

Applicant
LEARNING OBJECTIVES
1. Identify the different types of interest; and

2. calculate simple and single-sum compounded

interest.
 Suppose someone asked you, “Would you rather have
1,000 pesos today or 1,000 pesos 3 years from now?
INTEREST
 It is the cost of the use of money over time.
 It is an expense to the borrower and revenue to the
lender.
2 TYPES OF INTEREST
1. Simple Interest- is the interest on the original
principal (amount originally received or paid) regardless
of the number of time periods that have passed or the
amount of interest that has been paid or accrued in the
past.

2. Compound Interest- is the interest that accrues on both the

principal and the past unpaid accrued interest
SIMPLE INTEREST
   SIMPLE INTEREST = Principal x rate x
time

where
p = principal
r = rate
t = time
   90- day note of P10,000 with 12 % was issued in
A
payment of an equipment . Calculate simple interest
incurred.
Given
p= P10,000
r-=12% or .12
t-=90/360
Interest = Principal x Rate x Time

= 10,000 x .12 x 90/360

= P 300
Example
A 2-year loan of P500 is made with 4% simple interest.
Find the interest earned.
SOLUTION

Given
  
p= P500
r= 4% or .04
t= 2

Formula:

Substitute: 500 (.04) (2)

Answer:
i=P 40
TYPES OF COMPOUND INTEREST
1. Single Sum or Single Deposit
A. Future Value of a Single Sum (F)
B. Present Value of a Single Sum (P)

2. Annuity
A. Ordinary Annuity
i. Future Value of Ordinary Annuity (F0)
ii. Present Value of Ordinary Annuity (P0)
B. Annuity Due
i. Future Value of Annuity Due (Fd)
ii. Present Value of Annuity Due (Pd)
C. Present Value of a Deferred Ordinary Annuity
1-A. FUTURE VALUE OF A SINGLE SUM
AT A COMPOUND INTEREST
 It is the original sum plus the compound interest, stated
as of a specific future date.

Problem 1-A . Suppose that a single amount of P

1,000.00 is invested in a savings account on December
31, 2015. What will be the amount in the savings account
on December 31, 2019 if interest at 14% is compounded
annually each year?
STEP 1: DRAW A TIME LINE
 Future value of a single sum at a compound interest

Example 1-A: How much will be in

the savings account
P 1000 is invested on
( the future value) on
this date
this date ?

Dec . 31, Dec . 31, Dec . 31, Dec . 31, Dec . 31,
2015 2016 2017 2018 2019

Interest Rate is 14% Compounded Annually

STEP 2: USE LONGHAND ARITHMETIC APPROACH OR
FORMULA METHOD OR TABLE FACTOR APPROACH

 Future value of a single sum at a compound interest

Exhibit 1-A: Calculation of Future Value of Single Sum at Compound

Interest
1 2 3 4
Annual
Value at Compound Future Value at
Year
Beginning of the Interest (Col. 2 x End of the Year
Year 0.14) (Col. 2 + Col. 3)
2016 1,000.00 140.00 1,140.00
2017 1,140.00 159.60 1,299.60
2018 1,299.60 181.94 1,481.54
2019 1,481.54 207.42 1,688.96
USING FORMULA METHOD
 F= P(1+i)n

 where: F= Future Value of Single Sum

P= Principal Sum (Present Value)
i= interest rate for each of the stated time periods
n= number of time periods multiplied by number of years

F= ?
P= 1,000
i= 14% compounded annually or 0.14
n= 4

F= 1,000 (1+0.14)4
F= 1,688.96
Using the Calculator :press 1000(1+.14)^4=
USING TABLE APPROACH
 To develop additional Shortcuts to the solution of the
compound interest, tables for the future values of 1 have
been reconstructed.

Solution:

F= P(Table Factor for

Fn,i)

F= P1,000(1.688960)

F= P 1,688.96
TAKE NOTE:
 It is important to observe that the interest rate (i) is the
rate of interest applicable for the particular time period
for which interest is compounded. For Example, a stated
rate of interest 12% is
 12% per year if interest is compounded annually
 6% per one-half year if interest is compounded semi-
annually
 3% per quarter if interest is compounded quarterly
 1% per month if interest is compounded monthly
TAKE NOTE:
 Computing For n:

n= number of compounding period/s in a year multiplied

by the number of years

Ex. 5 years:
Annually; n= 1 x 5=5
Semi-annually; n= 2 x 5= 10
Quarterly; n= 4 x 5= 20
Monthly; n= 12 x 5= 60
1-B. PRESENT VALUE OF SINGLE SUM
 It is the principal that must be invested at time period
zero to produce the known future value.

Example: How much should be deposited today to earn P

1,688.96 in 4-year period savings account if interest
accumulates by 14% compounded annually?
DISCOUNTING
 the process of determining the present value of a
payment or a stream of payments that is to be received or
paid in the future.
STEP 1: DRAW A TIME LINE
 Present Value of single sum

Example 1-B: P1,688.96 will be

received on this date
How much must be
invested on this date?

Dec . 31, Dec . 31, Dec . 31, Dec . 31, Dec . 31,
2015 2016 2017 2018 2019

Interest Rate is 14% Compounded Annually

STEP 2: USE LONGHAND ARITHMETIC APPROACH
OR FORMULA METHOD OR TABLE APPROACH

 Present Value of single sum

Exhibit 1-A: Calculation of Present Value of Single Sum at Compound Interest

1 2 3 4
Annual Compound Value at Beginning of
Year Future Value at Interest (Col. 2 minus the Year (col. 2
End of the Year col.4) divided by 1.14)
2016 1,688.96 207.42 1,481.54
2017 1,481.54 181.94 1,299.60
2018 1,299.60 159.60 1,140.00
2019 1,140.00 140.00 1,000.00
USING FORMULA METHOD
 P= F 1/ (1+i)n
 Or PV = FV(1+i)-n

 Where: F= Future Value of Single Sum

 P= Principal Sum (Present Value)
 i= interest rate for each of the stated time periods
 n= number of time periods multiplied by number of years

 F= 1,688.96
 P= ?
 i= 14% compounded annually
 n= 4
 P= 1,688.96 1/(1+i)4

 Using the calculator : press 1688.96 x ((1/(1+.14)^4))=

USING TABLE APPROACH
 Refer to Present Value of 1 table

P= F ( Present Value Factor 4, 14%)

P= 1,688.96 (.592080)

P=1,000.00
RUBRICS (A MINUTE TO WIN IT !)
5- The group has perfectly identified and calculated simple interest and
compound interest of single sum.

4- The group has identified and calculated simple interest and compound
interest of single sum but with some minor errors in the process.

3- The group has identified and calculated simple interest and compound
interest of single sum but has some major errors in the process.

2- The group identified the type of interest correctly yet failed to

calculate simple interest and compound interest of single sum.

1- The group failed to identify and calculate simple interest and

compound interest of single sum but has somehow managed to use the
formula and made some solutions in solving
APPLICATION
1. A total of P3,200 is invested at a simple interest rate of
6% for 6 months. How much interest is earned on this
investment?
SOLUTION

Given:
P=1200
r=6%
t=4mos in terms of years or 4mos/12mos. Or 1/3
Formula: i= Prt
Substitute: i= 3200(.06) (1/2)
Answer: i= 96
2.How much must you deposit in an account today so that
you have a balance of P 2,000 at the end of six years if
interest on the account is 4% compounded annually?
Given:
F=2,000
P= ?
i=4% compounded annually
n=4
 Formula: P= F (1/ (1+i)n )
Substitute: P= 2,000 (1/(1+.04)4
Answer: P= 1,580.62
3. Mr. Vasquez deposited P20,000 in a special savings
account that provides for interest at the annual rate of 12 %
compounded semi-annually if the deposit is maintained for
4 years.

Required: Calculate the balance of the savings

account at the end of the 4-year period.
Given:
F=?
P= P 20,000
i=12% compounded semi-annually
n=2 x 4
 Formula: F= P(1+i)n
Substitute: F= 20,000 (1+.06)8
Answer: F= 31,876.96
EVALUATION (1/2 SHEET OF PAPER) 15
MINS
1. How much must you deposit in an account today so
that you have a balance of P 1,000 at the end of five
years if interest on the account is 4% compounded
quarterly? (5 pts)
2. A total of P1,200 is invested at a simple interest rate
of 6% for 4 months. How much interest is earned on
this investment? (5 pts)
Required
 Identify what type of interest ; and

 Calculate using formula method for simple interest or

compound interest of single sum.
ASSIGNMENT (1 WHOLE )
Problem Solving:
A friend of you has won a prize of P 10,000 to be
paid exactly after 2 years. On the same day, he was
offered P 8,000 as a consideration for his agreement to
sell the right to receive the prize. The market
interest rate is 12% and the interest is compounded on
monthly basis. Help him by determining whether
the offer should be accepted or not.

Required: Calculate using formula method in determining

whether the offer should be accepted or not.
 
MEASUREMENTS INVOLVING AN
ANNUITY
 Annuity is a series of EQUAL cash flows (deposits,
receipts, payments, or withdrawals), often referred to as
RENTS, made at regular intervals with interest
compounded at a certain rate.
 4 conditions MUST BE present (ETCC)

1. Equal periodic cash flows

2. Time period between cash flows are the same length

3. Constant interest rate for each period

4. Compounded at the end of each time period

2-A: FUTURE VALUE OF ORDINARY
ANNUITY
 It is determined immediately after the last cash flow
(rent) in the series is made.

Example: Assume that Debbi wants to calculate the future

value of 4 rents of P1,000.00, each with interest
compounded annually at 14% where the first 1,000.00 cash
flow occurs on December 31, 2015 and the last P 1,000.00
occurs on December 31, 2018.
STEP 1: DRAW A TIME LINE
 Future value of Ordinary Annuity

Example 2-A: The future value of an ordinary annuity is

4 annual rents of P determined immediately after the last
1,000.00 each P1,000 rent is made

P 1000 P 1000 P 1000 P 1000

Dec . 31, Dec . 31, Dec . 31, Dec . 31,

2015 2016 2017 2018

Interest Rate is 14% Compounded Annually

USE LONGHAND ARITHMETIC APPROACH OR
FORMULA METHOD OR TABLE APPROACH
 Future value of Ordinary Annuity
Exhibit 1-A: Calculation of Future Value of Ordinary Annuity
1 2 3 4
Value at Annual
Year Beginning of the Compound Future Value at
Year Interest End of the Year
2015 1,000.00 481.54 1,481.54
2016 1,000.00 299.60 1,299.60
2017 1,000.00 140.00 1,140.00
2018 1,000.00 - 1,000.00
4,000.00 921.14 4,921.14
USING FORMULA METHOD
 
=R


Where: F0= future value of an ordinary annuity

R= amount of each rent (cash flow)
n= number of rents (not the number of compounding periods)
i= interest rate for each of the stated time periods.

=1,000

F0= 4,921.14
Using the calculator: 1000 (((1.14^4-1)/.14))
USING THE TABLE APPROACH
 Refer to Future Value of Ordinary Annuity of 1

 F0= R(F0 of 1 factor)

1,000(4.921144)
2-B: PRESENT VALUE OF ORDINARY
ANNUITY
 It is determined 1 period before the first cash flows (rent)

 Example: Assume that Kyle Vasky wants to calculate the

present value on January 1, 2015 of withdrawals of P
1,000.00 , with the first withdrawal being made on
December 31, 2015, interest rate 14% compounded
annually.
STEP 1: DRAW A TIME LINE

Example 1-A: 4 withdrawals (rent) of P

The present value of an ordinary annuity is 1,000.00
determined one period before the withdrawal of
the first rent

P 1,000.00 P 1,000.00 P 1,000.00 P 1,000.00

Jan . 1, Dec . 31, Dec . 31, Dec . 31, Dec . 31,

2015 2015 2016 2017 2018

Interest Rate is 14% Compounded Annually

STEP 2: USE LONGHAND ARITHMETIC APPROACH
OR FORMULA METHOD OR TABLE APPROACH
 Present value of ordinary annuity

Calculation of Present Value of an Ordinary Annuity

1 2 3 4 5
Annual Value at
Compound beginning of the
Interest year (col
Year Rent Discounted 3(1/(1+.14)^col 1
1 2015 1000 122.81 877.19
2 2016 1000 230.53 769.47
3 2017 1000 325.03 674.97
4 2018 1000 407.92 592.08
4000 1,086.29 2,913.71
USING FORMULA METHOD
  1− 1
P0= R

( ( 1 +𝑖 ) 𝑛
𝑖
)
Where: P0= present value of ordinary annuity of a series of
any amount
R= amount of each rent (cash flows)
n= number of rents (not the number of time periods)
i= interest rate for each of the stated time periods
GIVEN:
 P0= ?
 R=1,000
 n= 4

 i= 14%

Substitute:
  1− 1

P0= 1,000
( ( 1+.14 ) 4
.14
)
P0= 2, 913.71
Using the calculator: 1-(1/(1+.14)^4 = /.14 x 1000
1-1/(1+.14)^4 = .14 x 1000
GAMESHOW: “ A MINUTE TO WIN IT”
1. Mr. Vasquez deposited P20,000 in a special savings
account that provides for interest at the annual rate of
12 % compounded semi-annually if the deposit is
maintained for 4 years.

Required: Calculate the balance of the savings

account at the end of the 4-year period.
2. What is the value on January 1, 2018 of
P10,000 deposited on July 1, 2012 which
accumulates interest at 16% compounded semi-
annually?
PROBLEM SOLVING
3. What is the present value on January 1,2015 of P30,000
due on January 1,2020 and discounted at 12% compounded
annually?

4. What is the compound discount on P8,000.00 due at the

end of 5 years at 10% compounded annually?
PROBLEM SOLVING
5. What is the future value on December 31,2004 of 7
rents of P 10,000.00, with the first rent being made on
December 31,1998 and interest at 12% being
compounded annually?
PROBLEM SOLVING
 Samuel David wants to make 5 equal annual withdrawals
of P 8,000.00 from a fund that will earn interest at 10%
compounded annually
1. January 1,1998 if the first withdrawal is made on
January 1,1999?
2. January 1, 1998 if the first withdrawal is made on
January 1,1998?
2-A FUTURE VALUE OF ANNUITY DUE
 Is determined 1 period after the last cash flow (rent) in
the series

 Example Assume that Ronald Jacobson deposits in a

fund 4 payments of P1,000 each beginning December
31, 2015, with the last deposit being made on December
31,2018. How much will be in the fund on December
31, 2019, 1 year after the final payment has been made,
if the fund earns interest at 14% compounded annually?
STEP 1: DRAW A TIME LINE

Example 2-A: How much will be in the fund on this,

4 annual rents of P which is 1 period after the last rent in the
1,000.00 each series?

P 1000 P 1000 P 1000 P 1000

Dec . 31, Dec . 31, Dec . 31, Dec . 31,

2015 2016 2017 2018

Interest Rate is 14% Compounded Annually

STEP 2: SOLUTION METHOD
1. In the ordinary annuity table( Table 2) look up the
value of n+1 rents at 14% or the value of rents at 145
2. Then subtract 1 without interest from the value
obtained in Step 1
3. Multiply the amount of each rent, here P 1,000.00 by
the converted table factor for determined in Step 2

Fd= 1000 (3.610104)= 5, 610.00

PRESENT VALUE OF AN ANNUITY DUE
 Pd is determined on the date of the first cash flow (rent)
in the series

 Example Barbara Livingston wants to calculate the

present value of an annuity on December 31, 2015, while
will permit 4 annual future receipts (rents) of P 1,000
each, the first to be received on December 31, 2015,
interest rate is 14% compounded annually
STEP 1: DRAW A TIME LINE

The present value of an annuity due is

determined on this date, which is the date
Example 2-A:
of the first receipt of a rent 4 annual rents of P
1,000.00 each

P 1000 P 1000 P 1000 P 1000

Dec . 31, Dec . 31, Dec . 31, Dec . 31,

2015 2016 2017 2018

Interest Rate is 14% Compounded Annually

STEP 2: FORMULA METHOD
 Pd= 1- 1
(1+i) n-1
R +1

i
Where; Pd= present value of an annuity due of a series
of rents of any amount
R= amount of each rent (cash flow)
n= number of rents (not the number of time
periods
Substitute; Pd= ?
R= 1,000.00
n=4
i= 14% compounded annually
SOLUTION
 Pd= 1000.00 1- 1
(1+0.14)4-1 +1

0.14

= 1,000(3.321632)
= P 3, 321.63
ALTERNATIVE TABLE APPROACH
 Step 1 In the ordinary annuity
table, ;look up the present value of n- 2.321632
1 rents at 14% or the value of 3 rents
at 14%
 Step 2 Then add 1 without interest to
the value obtained in step 1 1.00000
3.321632
 Step 3 Multiply the amount of each
rent here 1,000 by the converted table
factor determined in step 2 Multiplied by
P 1,000.00

P 3,321,63
PRESENT VALUE OF A DEFERRED
ORDINARY ANNUITY
 Pdeferred is determined on a date 2 or more periods before
the first cash flow (rent) in the series.

 Suppose that Helen Swain buys an annuity on January 1,

2015 that yields her 4 annual rents of P1,000 each, with
the first rent to be received on January 1, 2019. The
interest rate is 14% compounded annually. What is the
cost of the annuity or the present value on January 1,
2015 of the 4 rents of P 1,000.00 each received on
January 1, 2019, 2020, 2021, 2022?
STEP 1: DRAW A TIME LINE

Example 2-A:
4 annual rents of P
The present value of the deferred annuity
1,000.00 each
is determined on this date, which is 2 or Deferred 3 periods
more periods before the receipt of the
first rent.
P 1000 P 1000 P 1000 P 1000

Jan. 1, Jan. 1, Jan. 1, Jan. 1,

2019 2020 2021 2022

Jan . 1, Jan . 1, Jan . 1, Jan. 1,

2015 2016 2017 2018

Interest Rate is 14% Compounded Annually

STEP 2:FORMULA METHOD
 Pdeferred= R (P0n,i)(Pk,i)

 Where; P0n,i= Present value of the ordinary

annuity of the n rents of 1 at the given interest rate
i.
Pk,I = Present value of the single sum of 1 for k
periods of deferment.

Substituting:
Pdeferred= R (P0n=4, i=14%)(Pk=3, i=14%) )
P 1,000.00 (2.913712)(0.674972)
= P1,966.67
PROBLEM SOLVING
 Potter wishes to deposit a sum that at 12% interest,
compounded semi-annually, will permit two
withdrawals: P 40,000 at the end of 4 years and P 50,000
at the end of 10 years. Analyze the problem to determine
the required deposit, stating the procedure to be followed
and the tables to be used in developing the solution.
1. What is the value on January 1, 2005 of P 40,000
deposited on January 1,1998 which accumulates interest at
12% compounded annually?

2. What is the value on January 1,2004 of P 10,000

deposited on July 1, 1998, which accumulates interest at
16% compounded quarterly?