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TIME VALUE OF

MONEY
A money received today is worth more than a peso received
tomorrow.

FUTURE

TODAY

100,000 now or 100,000 five years from now?

100,000 now or 125,000 five years from now?

WHICH WOULD YOU


TAKE?

To see which option is better we need to know what happens if we


take the 100,000 and invest it for five years.
Do we end up with more than 125,000, or less?
Say we deposit it in a bank paying 5% interest.
In the first year we have 5,000 interest (5% 100,000)

Amount at
the start of
year

Interest
earned

Amount at
the end of
year

Year 1

100,000

5,000

105,000

Year 2

105,000

5,250

110,250

Year 3

110,250

5,513

115,763

Year 4

115,763

5,788

121,551

Year 5

121,551

6,078

127,629

COMPOUNDING AND
DISCOUNTING
Timeline showing compounding to future value and
discounting to find present value
COMPOUNDING
FUTUR
E
VALUE

-1,000,000 100,000

200,000

350,000

PRESEN
T VALUE

DISCOUNTING

400,000

250,000

BASIC PATTERNS OF
CASHFLOW
SINGLE AMOUNT
A lump-sum amount either currently held or expected at
some future date.

Periods

Cash

i%

P100,000

BASIC PATTERNS OF CASHFLOW


ANNUITY
A series of equal annual payments at fixed intervals for
a specified number of periods.
Ordinary Annuity:
Periods 0

i%

100,000

Cash

100,000

100,000

100,000 100,000

Annuity Due:
Periods

Cash

i%

100,000

100,000

100,000 100,000

100,000

BASIC PATTERNS OF
CASHFLOW
MIXED STREAM
A stream of unequal periodic cash flows that reflect no
particular pattern.
Periods 0

Cash

i%

100,000

200,000

300,000

400,000

400,000

FUTURE VALUE
The value at a given future date of an amount placed
on deposit today and earning interest at a specified
rate.

FUTURE VALUE OF A SINGLE


What will be the amount of 500,000 at 10%
AMOUNT
annual interest be worth if left in the bank for 5
years?

Compound interest- interest earned on a given deposit


and has become part of the principal.
Principal- amount of money on which interest is paid.
Periods

Cash

10
%

PV=P500,0
00

FV?

THE EQUATION FOR FUTURE


VALUE

FVn PV 1 r

FVn = future value at the end of period n

PV

= initial principal, or present value

= annual rate of interest paid. ( I/YR,


i)
= number of periods that the money is left on deposit

Substituting the values:

FVn PV 1 r

FVn P500,000 1 0.10

FVn P805,255

FV5 P805,225
Periods

Cash

10
%

P500,000

PRESENT VALUE
The current value of a future amount the amount of
money that would have to be invested today at a given
interest rate over a specified period to equal the future
amount.
The value today of a given cash flow or series of cash
flows.

THE EQUATION FOR PRESENT


n
VALUEFVn PV 1 i

PV

FVn
(1 i )

or

PV FV 1 r

PRESENT VALUE OF A SINGLE


AMOUNT
What amount must be deposited today, at 7%, so
that it will be P2,500,000 in 20 years?

Periods
0

Cash

7%

PV?

9 1
0

1
1

12 13 1
4

1
5

1
6

1
7

18 19 2
0

FV=P2,500,0
0

Substituting the values:

PV

FVn
(1 i )

2,500,000
PV
20
1 .07

PV 646047.51
Periods
0

Cash

7%

PV?

PV 646047.51

9 1
0

1
1

12 13 1
4

1
5

1
6

1
7

18 19 2
0

FV=P2,500,0
0