Time Value of

Money
 After this session, the
participants should be able to:

1. Understand what is meant by "the time value

of money."
2. Understand the relationship between present
and future value.
3. Describe how the interest rate can be used to
adjust the value of cash flows – both forward
and backward – to a single point in time.
 Key Concepts

 The Interest Rate

 Simple Interest
 Compound Interest
 Getting Future Value
 Doubling Time of Money
 Getting Present Value
 The Interest Rate

Which would you prefer -- PhP10,000

today or PhP 10,000 in 5 years?

Obviously, PhP 10,000 today.

With this, you already recognize that

there is TIME VALUE TO MONEY!!
Why TIME?

Why is TIME such an important

element in your decision?

TIME allows you the opportunity to

postpone consumption and earn
instead INTEREST.
 Types of Interest

 Simple Interest
Interest paid (earned) on only the original
amount, or principal, borrowed (lent).
 Compound Interest
Interest paid (earned) on any previous
interest earned, as well as on the
principal borrowed (lent).
 Simple Interest Formula

Formula SI = P0 (i) (n)

SI: Simple Interest
P0: Deposit today (t=0)
i: Interest Rate per Period
n: Number of Time Periods
 Simple Interest Example
 Assume that you deposit PhP 1,000 in
an account earning 7% simple interest
for 2 years. What is the accumulated
interest at the end of the 2nd year?

SI = P0 (i) (n)

= PhP1,000(7/100)(2)
= PhP 140
 Simple Interest (FV)
 What is the Future Value (FV) of the
deposit?
FV = P0 + SI
= PhP 1,000 + PhP 140
= PhP 1,140
 FutureValue is the value at some future
time of a present amount of money, or a
series of payments, evaluated at a given
interest rate.
 Simple Interest (PV)
 What is the Present Value (PV) of the
previous problem?
The Present Value is simply the
PhP 1,000 you originally deposited.
That is the value today!
 PresentValue is the current value of a
future amount of money, or a series of
payments, evaluated at a given interest
rate.
 Why Compound Interest?
Future Value of a Single $1,000 Deposit
Future Value (U.S. Dollars)

20000
10% Simple
15000 Interest
7% Compound
10000
Interest
5000 10% Compound
Interest
0
1st Year 10th 20th 30th
Year Year Year
 Future Value
Single Deposit (Graphic)
Assume that you deposit PhP 1,000
at a compound interest rate of 7%
for 2 years.
0 1 2
7%
PhP 1,000
FV2
 Future Value
Single Deposit (Formula)
FV1 = P0 (1+i)1 = PhP1,000 (1.07)
= PhP 1,070
Compound Interest
You earned PhP 70 interest on your PhP
1,000 deposit over the first year.
This is the same amount of interest you
would earn under simple interest.
 Future Value
Single Deposit (Formula)
FV1 = P0 (1+i)1 = PhP 1,000 (1.07)
= PhP 1,070
FV2 = FV1 (1+i)1
= P0 (1+i)(1+i)
= PhP 1,000(1.07)(1.07)
= P0 (1+i)2 = PhP 1,000(1.07)2
= PhP 1,144.90
You earned an EXTRA PhP 4.90 in Year 2 with compound
over simple interest.
 General Future
Value Formula
FV1 = P0(1+i)1
FV2 = P0(1+i)2
etc.

General Future Value Formula:

FVn = P0 (1+i)n
or FVn = P0 (FV/PV,i,n) -- Table
value
 Valuation Using Table I
FV, i, n is found on Table
at the most Eng’g Economy or Financial books

Period 6% 7% 8%
1 1.060 1.070 1.080
2 1.124 1.145 1.166
3 1.191 1.225 1.260
4 1.262 1.311 1.360
5 1.338 1.403 1.469
 Using Future Value Tables
FV2 = PhP 1,000 (FV/PV,7%,2)
= PhP1,000 (1.145)
= PhP 1,145
Period 6% 7% 8%
1 1.060 1.070 1.080
2 1.124 1.145 1.166
3 1.191 1.225 1.260
4 1.262 1.311 1.360
5 1.338 1.403 1.469
 Story Problem Example
Juan dela Cruz wants to know how large his
deposit of PhP 10,000 today will become at a
compound annual interest rate of 10% for 5 years.

0 1 2 3 4 5
10%
PhP 10,000
FV5
 Story Problem Solution
 Calculation based on general formula:
FVn = P0 (1+i)n
FV5 = PhP 10,000 (1+ 0.10)5
= PHP 16,105.10
 Calculation based on Table values:
FV5 = PhP 10,000 (FV/PV,10%, 5)
= PhP 10,000 (1.611)
= PhP 16,110 [Due to Rounding]
Double Your Money!!!

Quick! How long does it take to

double PhP 5,000 at a compound
rate of 12% per year (approx.)?

We will use the “Rule-of-72”.

 The “Rule-of-72”

Quick! How long does it take to

double PhP 5,000 at a compound
rate of 12% per year (approx.)?

Approx. Years to Double = 72 / i%

72 / 12% = 6 Years
[Note: Actual Time is 6.12 Years]
 Present Value
Single Deposit (Graphic)
Assume that you need PhP 1,000 in 2
years. Let’s examine the process to
determine how much you need to deposit
today at a discount rate of 7%
compounded annually.
0 1 2
7%
PhP1,000
PV0 PV1
 Present Value
Single Deposit (Formula)

PV0 = FV2 / (1+i)2 = PhP 1,000 / (1.07)2

= FV2 / (1+i)2 = PhP 873.44

0 1 2
7%
PhP 1,000
PV0
 General Present
Value Formula
PV0 = FV1 / (1+i)1
PV0 = FV2 / (1+i)2
etc.

General Present Value Formula:

PV0 = FVn / (1+i)n
or PV0 = FVn (PV/FV, i,n) - See Table
 Valuation Using Table
P/F,i,n is found on Tables at the end of the
most Eng’g Economy and Financial books.

Period 6% 7% 8%
1 .943 .935 .926
2 .890 .873 .857
3 .840 .816 .794
4 .792 .763 .735
5 .747 .713 .681
 Using Present Value Tables
PV2 = PhP 1,000 (PV/FV,7%,2)
= PhP 1,000 (0.873)
= PhP 873 [Due to
Rounding]
Period 6% 7% 8%
1 .943 .935 .926
2 .890 .873 .857
3 .840 .816 .794
4 .792 .763 .735
5 .747 .713 .681
 Story Problem Example
Juan dela Cruz wants to know how large
of a deposit to make so that the money
will grow to PhP 10,000 in 5 years at a
discount rate of 10%.
0 1 2 3 4 5
10%
PhP 10,000
PV0
 Story Problem Solution
 Calculation based on general formula:
PV0 = FVn / (1+i)n
PV0 = PhP 10,000 / (1+ 0.10)5
= PhP 6,209.21
 Calculation based on Table :
PV0 = PhP 10,000 (PV/FV,10%,5)
= PhP 10,000 (0.621)
= PhP 6,210.00 [Due to Rounding]