The Value of Money

Prepared by: Ms. Edel Juachon

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Objectives
• Discuss future value of single amount
• Describe future value of annuity
• Differentiate present value of single amount and annuity
• State the formula to compute for present and future values.

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 Future Value : Single Amount
• Time value of money plays a very important role in making long-term
investment decisions.

• The basic tenet in finance relative to time value of money is: The peso
today is worth more than a peso in the future.

• In the time value of money analysis, compound interest, and not

simple interest, is applied.

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Simple Interest
• Simple Interest:
Means the amount of interest is computed only once during the term of the investment or
borrowing regardless of whether the term is less than one year, equal to one year, or more
than one year.

I=PxRxT

When:
I – Interest
P – Principal
R – Rate
T - Time

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Compound Interest

• Compound Interest:
On the other hand, indicates that the interest of one compounding period is
added to the principal of that prior period to form the new principal as basis for
computing the interest of succeeding periods.

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Illustration 1
• Nicanor has invested P300,000 at 6% simple interest for a period of
three years.
• Required: Compute the simple interest

I=PxRxT
= P300,000 (.06) (3)
= P18,000 (3)
= P54,000

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Illustration 2
• Nicanor has invested P300,000 at 6% simple interest for a period of 120 days.
• Required: Compute the simple interest

I=PxRxT
= P300,000 (.06) (120/360)
= P18,000 (0.33)
= P5,999.99 ( round of to nearest whole number)
= P6,000

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Future value – using Formula
• To facilitate an easier computation of future value, the following formula has
been developed.

FV = PV (1 + i)n

When:
FV – Future value
PV – Present value
i – Periodic interest rate
n - Total number of compounding periods

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Terms
• Nominal rate:
Rate of investment or borrowings.
• Compounding periods
Refers to the period of conversion made during the year. It can be annual (1), semi-annual
(2), quarterly (4), or monthly 12).
• Frequency conversion:
Number of times interest is added to the principal during the year.
• Total compounding period (n):
Refers to the number of times an interest is compounded during the term of the
investment.
• Periodic interest rate (i) :
Refers to the interest rate per compounding period.

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Illustration 3
• Yvonne invested P200,000 at 8% interest compounded quarterly for a
period of 5 years.
• Required: Using the table of future value, compute the amount of the
investment at the end of the fifth year.
(Table)
Present value P200,000
Nominal rate 8%
Frequency of conversion 4 (quarterly)
Periodic interest rate ?
Terms 5 years
Total compounding years ?
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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Present value P200,000
Nominal rate 8% = 8%
Frequency of conversion 4 (quarterly) 4
Periodic interest rate (i) ? = .02
= 2%
Terms 5 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 5 years x 4
= 20

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 Solution 2 FV = PV (1 + i)n

= P200,000 (1 + 2%) 20
• FV = PV (1 + i)n
= P200,000 (1.02) 20
Present value P200,000 = P200,000 (1.485947396)
Nominal rate 8% = P200,000 (1.4859) - 4 decimal places
Frequency of conversion 4 (quarterly) = P297,180
Periodic interest rate (i) 2%
Terms 5 years
Total compounding years (n) 20

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Future value – using Annuity
• Annuity
• Refers to a series of consecutive equal investments or payments made at an equal interval of
time.

FV = A (1 + i)n - 1
i
When:
FV – Future value
A – Annuity
i – Periodic interest rate
n - Total number of compounding periods

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Illustration 4
• P 5,000 quarterly investment at 10% interest compounded semi-annual for 4
years. Compute for the future value of annuity investment.

Annuity P5,000
Nominal rate 10%
Frequency of conversion 2 (semi-annual)
Periodic interest rate (i) ?
Terms 4 years
Total compounding years (n) ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Annuity P5,000
Nominal rate 10% = 10%
Frequency of conversion 2 (semi-annual) 2
Periodic interest rate (i) ? = .05
= 5%
Terms 4 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 4 years x 2
=8

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 FV = A (1 + i)n - 1
Solution 2 i

FV = P5,000 (1 + 5%)8 - 1
FV = A (1 + i)n - 1 5%
i FV = P5,000 (1.05)8 - 1
Annuity P5,000 5%
Nominal rate 10% FV = P5,000 (1.477455444) - 1
5%
Frequency of conversion 2 (semi-annual) FV = P5,000 (0.477455444)
Periodic interest rate (i) 5% 5%
Terms 4 years FV = P5,000 (9.549108876)
Total compounding years (n) 8 FV = P5,000 (9.5491) 4 decimals
FV = P47,745.5 (round off)

FV = P47,746
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PRESENT VALUE: SINGLE AMOUNT
• Present value
• Simply refers to the value of the money at present.
• Hence the P100 in your pocket today has a present value of P100. However the
amount of P100 10 years from now is not the same as P100 today.
• Its present value is definitely lower.

Periods
0 1 2 3 n 10
P100 ?

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Present value Using Formula
• To facilitate an easier computation of present value, the following formula has
been developed.

PV = FV (1 + i)-n

When:
PV – Present value
FV – Future value
i – Periodic interest rate
n - Total number of compounding periods

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Illustration 5
• Princess’s goal is to have an investment of P500,000 after four years. The amount to be
invested will earn an interest of 12% compounded quarterly.
• Required: Determine the amount to be invested by Princess at 12% interest
compounded quarterly.

(Table)
Future valueP500,000
Nominal rate 12%
Frequency of conversion 4 (quarterly)
Periodic interest rate ?
Terms 4 years
Total compounding years ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Future value P500,000
Nominal rate 12% = 12%
Frequency of conversion 4 (quarterly) 4
Periodic interest rate (i) ? = .03
= 3%
Terms 4 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 4 years x 4
= 16

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 Solution 2 PV = FV (1 + i)-n

= P500,000 (1 + 3%)-16
• PV = FV (1 + i)-n
= P500,000 (1.03) -16
Future value P500,000 = P500,000 (0.6231669392)
Nominal rate 8% = P500,000 (0.6232) - 4 decimal places
Frequency of conversion 4 (quarterly) = P311,600
Periodic interest rate (i) 3%
Terms 5 years
Total compounding years (n) 16

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Present value – using Annuity
• Present value of Annuity
• Refers to the present value of all individual of all individual investment or deposit made.

PV = A 1-(1 + i)-n
i
When:
PV – Present value
A – Annuity investment
i – Periodic interest rate
n - Total number of compounding periods

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Illustration 6
• Rolly invests P 5,000 every end of six months for six years. The money is
compounded semi-annually at a nominal rate of 8%.
• Required: Determine the present value of the annuity of using the factor
value.
Annuity investment P5,000
Nominal rate 8%
Frequency of conversion 2 (semi-annual)
Periodic interest rate (i) ?
Terms 6 years
Total compounding years (n) ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Annuity investment P5,000
Nominal rate 8% = 8%
Frequency of conversion 2 (semi-annual) 2
Periodic interest rate (i) ? = .04
= 4%
Terms 6 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 6 years x 2
= 12

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 PV = A 1-(1 + i)-n
i
Solution 2
PV = P5,000 1- (1 + 4%)-12
4%
PV = A 1 - (1 + i)-n PV = P5,000 1-(1.04)-12
i 4%
Annuity investment P5,000 PV = P5,000 1-(0.6245970496)
Nominal rate 8% 4%
Frequency of conversion 2 (semi-annual) PV = P5,000 (0.3754029504)
4%
Periodic interest rate (i) 4% PV = P5,000 (9.38507376)
Terms 4 years
Total compounding years (n) 12 PV = P5,000 (9.3851) 4 decimal places

PV = 46,925.5 (round up to whole number)

PV = P46,926
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Illustration 7 – Future Value – using formula
• Yvonne invested P300,000 at 12% interest compounded quarterly for a
period of 7 years.
• Required: Using the table of future value, compute the amount of the
investment at the end of the seventh year.
(Table)
Present value P300,000
Nominal rate 12%
Frequency of conversion 4 (quarterly)
Periodic interest rate ?
Terms 7 years
Total compounding years ?
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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Present value P300,000
Nominal rate 12% = 12%
Frequency of conversion 4 (quarterly) 4
Periodic interest rate (i) ? = .03
= 3%
Terms 7 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 7 years x 4
= 28

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 Solution 2 FV = PV (1 + i)n

= P300,000 (1 + 3%) 28
• FV = PV (1 + i)n
= P300,000 (1.03) 28
Present value P300,000 = P300,000 (2.287927676)
Nominal rate 12% = P300,000 (2.2879) - 4 decimal places
Frequency of conversion 4 (quarterly) = P686,370
Periodic interest rate (i) 3%
Terms 5 years
Total compounding years (n) 28

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Illustration 8 - Future value – using Annuity
• P 6,000 quarterly investment at 8% interest compounded semi-annual for 5
years. Compute for the future value of annuity investment.

Annuity P6,000
Nominal rate 8%
Frequency of conversion 2 (semi-annual)
Periodic interest rate (i) ?
Terms 5 years
Total compounding years (n) ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Annuity P6,000
Nominal rate 8% = 8%
Frequency of conversion 2 (semi-annual) 2
Periodic interest rate (i) ? = .04
= 4%
Terms 5 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 5 years x 2
= 10

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 FV = A (1 + i)n - 1
Solution 2 i

FV = P6,000 (1 + 4%)10 - 1
4%
FV = A (1 + i)n - 1 FV = P6,000 (1.04)10 - 1
i 4%
Annuity P6,000 FV = P6,000 (1.480244285) - 1
4%
Nominal rate 8% FV = P6,000 (0.480244285)
Frequency of conversion 2 (semi-annual) 4%
FV = P6,000 (12.00610712)
Periodic interest rate (i) 4%
Terms 4 years FV = P6,000 (12.0061) 4 decimal places

Total compounding years (n) 10 FV = P72,036.6 (round up)

FV = P72,037

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Illustration 9 – Present Value – using formula
• Princess’s goal is to have an investment of P400,000 after four years. The amount to be
invested will earn an interest of 10% compounded quarterly.
• Required: Determine the amount to be invested by Princess at 10% interest
compounded quarterly.

(Table)
Future valueP400,000
Nominal rate 10%
Frequency of conversion 4 (quarterly)
Periodic interest rate ?
Terms 4 years
Total compounding years ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Future value P400,000
Nominal rate 10% = 10%
Frequency of conversion 4 (quarterly) 4
Periodic interest rate (i) ? = .025
= 2.5%
Terms 4 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 4 years x 4
= 16

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 Solution 2 PV = FV (1 + i)-n

= P400,000 (1 + 2.5%)-16
• PV = FV (1 + i)-n
= P400,000 (1.025) -16
Future value P400,000 = P400,000 (0.6736249335)
Nominal rate 10% = P400,000 (0.6736) - 4 decimal places
Frequency of conversion 4 (quarterly) = P269,440
Periodic interest rate (i) 2.5%
Terms 5 years
Total compounding years (n) 16

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Illustration 6 – Present value - Annuity
• Rolly invests P 6,000 every end of six months for six years. The money is
compounded semi-annually at a nominal rate of 10%.
• Required: Determine the present value of the annuity of using the factor
value.
Annuity investment P6,000
Nominal rate 10%
Frequency of conversion 2 (semi-annual)
Periodic interest rate (i) ?
Terms 6 years
Total compounding years (n) ?

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 Solution Periodic Interest rate = nominal rate
frequency of conversion
Annuity investment P6,000
Nominal rate 10 % = 10%
Frequency of conversion 2 (semi-annual) 2
Periodic interest rate (i) ? = .03
= 3%
Terms 6 years
Total compounding years (n) ?

Total compounding years = terms x frequency of conversion

= 6 years x 2
= 12

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 PV = A 1-(1 + i)-n
i
Solution 2
PV = P6,000 1- (1 + 3%)-12
3%
PV = A 1 - (1 + i)-n PV = P6,000 1-(1.03)-12
i 3%
Annuity investment P6,000 PV = P6,000 1-(0.7013798802)
Nominal rate 10% 3%
Frequency of conversion 2 (semi-annual) PV = P6,000 (0.2986201198)
3%
Periodic interest rate (i) 3% PV = P6,000 (9.954003994)
Terms 4 years
Total compounding years (n) 12 PV = P6,000 (9.9540) 4 decimal places

PV = P59,724

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Thank You!

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End of Presentation

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End of Presentation

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