Group

4
 "A peso today is worth more than a
peso tomorrow."

Because cash flows occur at extended periods of time, the time

value of money must be considered in making the appropriate
investment and financing decision.
Individuals prefer to receive a peso
now instead of later because:
a.we can invest the peso now and earn a return from
this investment
b.a peso expected to be received in the future is
riskier and less certain.
It is the concept that a sum of money is worth more
now than the same sum will be at a future date due to
its earnings potential.
Analysis helps managers and investors compare cash
flows today versus cash flows in the future.
Simple
Interest
If the interestearned or incurred is always based on
the original principal, then simple interest is assumed.

I=PxRxT
Where:
I = Interest
P=
Principal R
= Rate
T = Time
Example
: A friend asks to borrow P 3,000 and agrees to repay it
in 2 years with 3% interest. How much interest will you
earn?
I=PxRxT
I = 3,000 x .03 x 2
I = P 180
How much is the total amount you will receive?
= Interest + Principal
= 180 + 3,000
= P 3,180
 Compound
Interest
Compound interest is simply earning interest on interest.

Example
A friend asks to borrow P 3,000 and agrees to repay it in 2
years
with 3% interest. How much interest will you earn?
Year 1: 3,000 x .03 = 90
Year 2: 3,090 x .03 = 92 .7
Accumulated Interest = P 182 .7
Total Amount to be received: P 3,182 .7
Future
Value
the value of a current asset at a future date based on an
assumed rate of growth
the amount which an investment will grow after earning interest.
Present
the
Valuevalue in the present of a sum of money, in contrast to some
future value it will have when it has been invested at compound
interest.
the amount you must invest today if you want to have a certain
amountof cash flow in the future.
Effective Interest
Rate
An effective annual interest rate is the real return on a
savings account or any interest-paying investment when the
effects of compounding over time are taken into account.

It also reflects the real percentage rate owed in interest on a

loan, a credit card, or any other debt.

It is also called the effective interest rate, the effective rate, or

the annual equivalent rate (AER).
Effective Interest
Rate
Loan
Amortization
business transaction that pays out an equal cash
flow stream regularly.
paying back the loan taken from financial institutions
or independent lenders so that every installment is
scheduled
Investment
Decision
also known as 'Capital Budgeting Decisions'
This decision relates to the careful selection
of assets in which funds will be invested
by the firms.
 Investment
Decision
Where to put the money?
Choose from wide range of real and
financial assets
Real assets: Equipment, machinery, office
building or factory
Financial assets: Shares of another company,
lending money to others, fixed
income instruments
Financing
Decision
Financial decision is important to make wise
decisions about when, where and how
should a business acquire fund.
Consequently, this relates to the composition
of various securities in the capital structure
of the company.
 Financing
Decision
Where to get the money?
Funding sources such as equity infusion
by investors
Borrowing from financial institutions (i.e.,
banks) Dividends vs interests