TIME VALUE OF

MONEY
A GLIMPSE INTO THE THE REAL VALUE OF MONEY
 TIMELINE
To begin the time value analysis, it is essential to set up
a time line that can help you visualize the situation.

Time value analysis is a fundamental concept in finance

that helps individuals and businesses make informed decisions
about investments, savings, and financial planning.
Illustration:
Periods 0 5% 1 2 3

Cash PV= P100 FV= ?

 TIME HORIZON
a horizontal time line that can be used to illustrate the
cash flows of a given investment or savings.
 ANNUITY
— a financial contract that provides a series of
regular payments or cash flows, typically over a
specified period of time.

2 DIFFERENT TYPES OF ANNUITY

1. Ordinary Annuity
- The payments occur at the end of each period.
2. Annuity Due
- The payments occur at the beginning of each period.
ANNUITY CASH FLOWS
 FUTURE VALUE
— A PESO IN HAND TODAY IS WORTH
MORE THAT A PESO TO BE RECEIVED IN
THE FUTURE SINCE IF YOU WILL INVEST
OR SAVE IT, IT EARNS INTEREST.
 COMPOUNDING
— When we are talking about
ompounding, we are looking for the
future values.
 SINGLE CASH FLOW
refers to a single, discrete amount
of money that is either received or
paid at a specific point in time.
Illustration:

Assume that on January 1, 2020, Celeste invested

P100.00 in a financing company. Celeste would like
to find out what would be the worth of her P100.00
after 3 years with an interest rate pegged at 5%.
SINGLE CASH FLOW
STEP-BY-STEP APPROACH
Multiply the initial amount, and
each succeeding amount, by (1 + i) or (1.05).
 SINGLE CASH FLOW
FORMULA APPROACH
The same problem can also be computed using a formula.
SINGLE CASH FLOW
USING INTEREST TABLES
SINGLE CASH FLOW
USING INTEREST TABLES
 ORDINARY ANNUITY
- annuity whose payments occur at
the end of each period.

Illustration:

Assume that Kawaii Company is to make annual

investment of P300,000 for four years. The interest
for this investment was pegged at 9%. The
investment is made at year end. What is the future
value of this annuity?
ORDINARY ANNUITY
STEP-BY-STEP METHOD
ORDINARY ANNUITY
FORMULA METHOD
 ANNUITY DUE
- annuity whose payments occur at
the beginning of each period.
Illustration:

Let us use the data of Kawaii Company in the

previous illustration. Assume that Kawaii is to make
annual investments of P300,000 for four years. The
interest for this investment was pegged at 9%. The
investment is made at the beginning of each year.
What is the future value of this annuity due?
ANNUITY DUE
FORMULA METHOD
 PRESENT VALUE
— the value today of a future cash flow
or series of cash flows. It is the opposite
of the future value
 DISCOUNTING
- the process of finding the present value of a
cash flow or a series of cash flows. It is the
reverse of compounding.
Illustration:
Assume that Quentin Corporation would like to know
the amount of investment it will make in order to
yield an amount of P200,000 which it will receive
three years from now. Assume that the rate for this
type of investment is 25%.
 DISCOUNTING
PVF = Present Value / Future Value
Period Computation FV of P1.00
PVF = 1.00 / 1.953125
PVF = 0.512
After 1st year 1 x 1.25 1.25
PV = PMT x PVF
After 2nd Year 1.25 x 1.25 1.5625
PV = 200,000 (0.512)
PV = 102,400.00 After 3rd Year 1.5625 x 1.25 1.953125
 DISCOUNTING USING
ORDINARY ANNUITY
Illustration:
Assume that on January 1 of the current year, Kei crporation sold its
property costing P600,000 for P900,000 to Doom Corporation. Doom
paid P300,000 as down payment and the balance was paid with a non-
interest bearing note for P600,000. The note shall be paid in equal
annual installments (this is the series of amounts that Kei will receive in
the future) every year end amounting P200,000/year. The prevailing
interest rate for this type of note is 10%. You have been tasked by Kei
Corporation on the present value of the note receivable to be
recognized by the company.
 DISCOUNTING USING
ORDINARY ANNUITY
PV = PMT x PV of ordinary annuity
PV Factor of
PV = 200,000 (2.4868)
Period Cash flow Present Value
P1.00 at 10% PV = 497,360.00
Year end
200,000 0.9091 181,820
1st year
Year end
200,000 0.82634 165,280
2nd Year
Year end 200,000 0.7513 150,260
3rd Year
2.4868 497,360
 DISCOUNTING USING
ANNUITY DUE
Illustration:
Assume that on January 1 of the current year, Kei Corporation sold its
property costing P600,000 for P900,000 to Doom Corporation. Doom
paid P300,000 as down payment and the balance was paid with a non-
interest bearing note for P600,000. The note shall be paid in equal
annual installments (this is the series of amounts that Kei will receive in
the future) at the beginning of each year amounting P200,000/year. The
prevailing interest rate for this type of note is 10%. You have been
tasked by Kei Corporation on the present value of the note receivable to
be recognized by the company
 JUDE TAN
PRESENT VALUE - WEEK 5
 UNEVEN CASH FLOW
— the stream of unequal periodic cash flows.
— refers to a situation where the inflow and
outflow of cash in a business or personal
financial situation are not consistent or
steady.
 FUTURE VALUES OF
COMPLEX STREAMS
Illustration:

Assume that Lily Company is to make an investment of uneven cash payments

for four years. The interest for this investment was pegged at 9%. The
investment is made every year end. What is the future value of this annuity?
Period Amount Imvested

December 31 - 1st Year 650, 000

December 31 - 2nd Year 600, 000

December 31 - 3rd Year 500, 000

December 31 - 4th Year 400, 000
 HOW TO SOLVE FOR THE FUTURE
VALUE OF COMPLEX CASH FLOWS:
Make sure that the cash flows is arranged in chronological order,
starting with the earliest cash flow and ending with the latest.
Determine the interest rate or discount rate that will be used to
calculate the future value.
Apply the Compound Interest Formula:
n-t
FV = PV × (1+r)
Where:
FV = Future Value
PV = Present Value (the initial amount of the cash flow)
r = Interest rate per period
n = Number of periods
t = period
FUTURE VALUES OF COMPLEX STREAMS
FUTURE VALUES OF COMPLEX STREAMS
 PRESENT VALUE OF COMPLEX STREAMS

Assume the following annual

payments of notes payable of Domo
Company with 8% discount rate.
What is the present value of the
annual payments? Consider the
following data:
 HOW TO SOLVE FOR THE PRESENT VALUE
OF COMPLEX CASH FLOWS:
METHOD 1
Make sure that the cash flows is arranged in chronological order, starting with
the earliest cash flow and ending with the latest.
Determine the interest rate or discount rate that will be used to calculate the
future value.
Apply the Compound Interest Formula:
PV = FV / (1+r) -n
Where:
FV = Future Value
PV = Present Value (the initial amount of the cash flow)
r = Interest rate per period
n = period
PRESENT VALUE OF COMPLEX STREAMS
(METHOD 1)
PRESENT VALUE OF COMPLEX STREAMS
(METHOD 2)
 PRESENT VALUE OF COMPLEX STREAMS
(METHOD 3)

Formula for 4th year

PRESENT VALUE OF COMPLEX STREAMS
(METHOD 4)
Thank You