PRESENT & FUTURE VALUES

WITH AMORTIZATION
SCHEDULE

MODULE 6
 LESSON CONTENT

LESSON 1: PRESENT & FUTURE VALUE

LESSON 2 : AMORTIZATION
 LEARNING OBJECTIVES

 Define concepts regarding Time Value of

Money

 Calculate present & future value of money

 Compute loan amortization using

mathematical concept
 LET’S HAVE A RECALL

 Banking Institutions

 Nonbanking Institutions

 5 CS in Credit

 Important requirements in acquiring

Loans.
 MOTIVATION

1. How important is time?

2. What are your most important

investments?
- your testimony
- your family
- your education
My most important investments
 TIME VALUE OF MONEY
• concept that money you have now is worth
more than the identical sum in the future
due to its potential earning capacity
• referred to as present discounted value
 WHAT IS INTEREST?

 money paid in exchange for borrowing or

using another person's or organization's
money
 calculated as a percentage of the money
borrowed
 DIFFERENTIATE SIMPLE &
COMPOUND INTEREST
SIMPLE INTEREST COMPOUND
• charging interest INTEREST
rate r based on a • the interest in the first
principal P over T compounding period is
added on the principal,
number of years.
which will then be the
basis for the interest to
I=P x R x T be computed for the
next period.
• Interest on interest
 EXAMPLE

• SOLUTION
Principal = PHP500,000
Rate = 8%
Time = 5 years
I= P x R x T
Compute for simple interest?
= 500,000 x 0.08 x 5
Every year interest is P40,000 SI=P200,000
EXAMPLE(COMPOUND INTEREST)
• SOLUTION
PRINCIPAL YEAR Interest INTEREST
Principal = PHP500,000
Rate = 8%
Time = 5 years 500,000 1 8% 40,000

Compounding Interest? 540,000 2 8% 43,200

583,200 3 8% 46,656

500,000 x (1.08)⁵-500,000 629,856 4 8% 50,388.48

CI=P234,000
680,244.48 5 8% 54,419.56
234,664.08
COMPOUNDING FREQUENCY

If the investment pays semi-annually, the

total interest will be equal to

Principal = PHP500,000
Rate = 8%
Time = 5 years
M- Compounding frequency = annually
I=P x (1+r/m)t x m-P
500,000 X (1 +0.08/2)⁵ ²
500,000 X 1.4802-500,000
240,122.14
COMPOUNDING RELATIONSHIP

• The shorter the compounding period, the

quicker the investment grows (daily)

• The longer the compounding period, the

slower the investment grows (annual)
Which investment would you rather own?

Investment Return Compounding

Investment A 12.0% annually
Investment B 11.9% semi-annually
Investment C 11.8% quarterly
Investment D 11.7% daily
 SOLUTION
Effective Interest Rate Formula:

((1 + Nominal return/# periods) # period) -1

• Investment A= (1+.12/1)1-1 = 12.00%

Investment B =• (1+.119/2)2–1 = 12.25%
• Investment C= (1+.118/4)4–1 = 12.33%
• Investment D= • (1+.117/365)365–1 = 12.41%
 DIFFERENTIATE PRESENT
VALUE/FUTURE VALUE

PRESENT VALUE FUTURE VALUE

the amount you have to invest today if
you want to have a certain amount of
cash flow in the future.
referred as Discounting
the amount to which an
investment will grow after
earning interest

Involves computed using

calculation using compounding
compounding
 PRESENT VALUE EQUATION

Present Value Mathematical Formula:

•PV = FV
(1 + r)T
•Key Inputs:
•FV= the future value of the investment at the end of n years
•R = the annual interest or discount rate
•T = the number of years
•PV = the Present Value, in today’s dollars, of a sum of money that you have or
plan to have
Key Statement for Present Value Problem

What is the present value of an investment that will come to you (n) years
in the future and at (I)% interest or discount rate?
 ILLUSTRATION

You are promised P50,000 in 2 years by

your rich uncle Phil. Assuming 6%
interest, what is the value today of Phil’s
promise? PV?
PV=50,000/(1+r)T
GIVEN:
50,000/(1.06)2
FV=P50,000
50,000/1.1236
T=2 YRS
PV= 44,499.82
R= 6%
 FUTURE VALUE EQUATION
FV= PV * (1 + r)t

•Key Inputs:

•FV = the future value of the investment at the end of n year

•r= the annual interest (or discount) rate
•PV = the present value, in today’s dollars, of a sum of money
that you already have or plan to have
Key Statement for Present Value Problem
What will be the future value of my investment (T) years in the future if my
interest rate is (R)%?
 ILLUSTRATION
FV= PV * (1 + r)t

A. Calculate the future value, in 15 years, of P5,000 earning

8% assuming an annual compounding period?
B. Calculate using Simple Interest

A. COMPOUND B. SIMPLE INTEREST

FV= 5,000 x (1 +.08)t FV= P + (P V x r )15

5,000 x(1.08)15 5,000+ (5,000 x.08 x 15)
FV=15,861.00 FV= 11,000
 ILLUSTRATION

INITIAL INVESTMENT VALUE OF INVESTMENT

PV FV
P1,000 P1,276.28

Invest an amount worth P1,000

with an interest of 5% for 5 years
HOW DID YOU GET?

FV=1,000 x(1 +.05)⁵

=1,000 x (1.05)⁵
= 1,000 x (1.2763)
FV = 1,276.30
 EXAMPLE

What amount they will

receive (what is the future
value) if PHP150,000 is FV=PV x(1 + I/2)n
invested at 6% per annum
compounded semi-
annually for 3 years
FV?
 ILLUSTRATION:PRESENT VALUE OF SINGLE
AMOUNT

How much must be invested

today to produce a certain
amount in the future?

You need P25,000.00 to buy

a laptop when you enter into
college 2 years from now.
How much must you invest
now if the interest rate is at PV=25,000/(1 +0.06)²
6% per annum? PV = 25,000/(1.06)² = PHP22,249.91
 PRESENT VALUE FORMULA
Terms- 2 years
Annually

P= FV/(1+R) 1st year

PV=FV/ (1 + R)² =2ND YEAR

Semi-annually
PV = FV/ (1 + R/2)² ²
 LETS TRY:

1. You deposited PHP2,500 in a bank with an

interest rate of 5% for 1 year. What is the future
value of your deposit? FV= 2,500 x(1.05
=P2,625.00
2.You need to save up for P2,500 in 1 year. How much
should you save now if the bank offers a rate of 5%?
(Find the present value)
PV=2,500/1.05
3.Mario will be making a lump sum payment of PHP2.6 =2,380.95
million on the condominium he is buying two years from
now. If he wants to set aside funds from now and invest
it that will earn interest of 3%, net of taxes every year
and this amount is compounded annually, how much
does he need to invest today? What if the interest is PV=2.6M/(1 +.03)²
compounded semi-annually, how much does he need =2,452,830.18
to invest today

PV=2.6M/(1 +.03/2)² ²
2.6M(1 .015)4
2,450,518.37
COMPUTATION OF LOAN
AMORTIZATION
 WHAT IS AMORTIZATION?

• accounting technique used to periodically

lower the book value of a loan or
intangible asset over a set period

• process of paying off debt

HOW TO CALCULATE LOAN
AMORTIZATION?
 1. You can download loan amortization
schedule calculator.

2. You can download this loan Amortization

schedule:
https://www.vertex42.com/ExcelTemplates/
loan-amortization-schedule.html
 Let’s Try(Refer to Excel)
• On October 01, 2020 avails a 5-year loan from Newton Bank amounting to
P1,500,000 with an interest rate of 9% per annum
DATE TOTAL PAYMENT PRINCIPAL INTEREST UNPAID
BALANCE

10/1/2020 1,500,000
10/1/21
10/1/22
10/1/23
10/1/24
10/1/25
 ACTIVITY Q4: 1.1
1. Present Value
2. Future Value
3. Loan Amortization Sched
THANK YOU