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MONEY
A money received today is worth more than a peso received
tomorrow.
FUTURE
TODAY
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
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.
Cash
10
%
PV=P500,0
00
FV?
FVn PV 1 r
PV
FVn PV 1 r
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.
PV
FVn
(1 i )
or
PV FV 1 r
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
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