TIME VALUE OF MONEY
(TVM)
Understanding the
Concepts and Applications
Joanna Hernandez
Argie Lindog
Reporters
Introduction to
Time Value of Money
(TVM)
• The Time Value of Money (TVM) concept reflects the
idea that money available today is more valuable than
the same amount in the future.
• This is because money today can earn interest, be
invested, or generate returns in various ways.
• So, the "time" part is crucial — the longer you have to
wait for money, the less valuable it is due to the
opportunity cost.
Basic Principle:
A peso today is worth more than
a peso in the future.
Core Concepts in
TVM
1. Future Value (FV)
2. Present Value (PV)
3. Interest Rate (r)
4. Number of periods
(n)
5. Cash Flow
Core Concepts in
TVMValue (FV): The value of an amount of money at a
• Future
specified time in the future, taking into account interest or
returns that could be earned on the investment.
• Present Value (PV): The value of money today, which is
equivalent to a future sum, discounted back to the present
time. Essentially, it tells you how much a future sum of
money is worth right now.
• Interest Rate (r): The rate at which money grows over
time. It can be seen as the return on an investment or the
cost of borrowing money.
• Number of Periods (n): The time span over which the
money is invested or borrowed, typically measured in years,
months, or other periods.
• Cash Flow: The movement of money into or out of a
business, investment, or account. Cash inflows increase
wealth, while outflows decrease it.
KEY TVM FORMULAS
Future Value
Future Value
example:
If you invest P1,000 at an interest rate of 5%
for 3 years, the future value will be:
FV = 1,000 x (1 + 0.05)³
= 1,000 x (1.05)³
= 1,000 x 1.1576
= 1, 157.60
KEY TVM FORMULAS
Present Value
Present Value
example:
If you are expecting to receive P1,157.63 in 3
years and the interest rate is 5%, the present
value would be:
PV = 1,157.63 ÷ (1 + 0.05)³
= 1,157.63 ÷ 1.157625)
= 1, 000
Annuities
An annuity is a series of equal payments made at
regular intervals. There are two common types of
annuities:
1.Ordinary Annuity: Payments are made at the
end of each period.
2.Annuity Due: Payments are made at the
beginning of each period.
KEY TVM FORMULAS
Future Value of an Ordinary
Annuity (FVOA)
Future Value of an Ordinary
Annuity (FVOA) example:
If you invest P1,000 at the end of each year for
three years at 10% interest, the future value of
the annuity is:
FVOA = P1,000 x [ (1.10)³ - 1 ]
10%
= 1,000 x 3.31
= P 3,310
KEY TVM FORMULAS
Present Value of an Ordinary
Annuity (PVOA)
Present Value of an Ordinary
Annuity (FVOA) example:
You want to calculate the present value of
receiving P1,000 per year for 5 years at an
interest rate of 5% per year.
PVOA = P1,000 x [ 1-(1.05) ⁵ ]
5%
= 1,000 x 4.32948
= P 4,329.48
KEY TVM FORMULAS
Future Value of an
Annuity Due (FVAD)
Future Value of an Annuity Due
(FVAD) example:
Let's say you deposit P1,000 at the beginning
of each year for 5 years into an account that
pays 6% annual interest.
FVAD = (1.06) X P1,000 x [ (1.06)⁵-1 ]
6%
= 1.06 x 1,000 x 5.6375
= P 5, 969.25
KEY TVM FORMULAS
Present Value of an
Annuity Due (PVAD)
Present Value of an Annuity
Due (PVAD) example:
Suppose you are a beneficiary designated to immediately receive
$1000 each year for 10 years, earning an annual interest rate of
3%. You want to know how much the stream of payments is
worth to you today. Based on the present value formula, the
present value is $8,786.11.
FVAD = (1.03) X P1,000 x [ 1-(1.03) ¹⁰ ]
3%
= 1.03 x 1,000 x 8.5302
= P 8,786.11
Reason for
TVM
Risk and Uncertainty– As we know
future is never certain and we
can’t determine the risk involved
in future, because outflow of cash
is in our hand as payment where
as there is no certainty for future
cash inflows
Importance of TVM
In Investment Decisions- Small businesses
often have limited resources to invest in
business operations, activities and
expansion. One of the factors we have to
look at is how to invest, is the time value
of money
In Capital Budgeting Decisions- When
a business chooses to invest money
in a project - such as an expansion, a
strategic acquisition or just the
purchase of a new piece of
equipment -- it may be years before
that project begins producing a
positive cash flow. The business
needs to know whether those future
cash flows are worth the upfront
investment.
The Bottom Line
• Always consider the time factor before
making financial decisions!
• Time Value of Money is essential for
investment, savings, loans, and financial
planning.
• TVM helps you make informed decisions
about the value of money today versus in
the future.
Thank You
Very Much!
