ABM Department

Accountancy, Business and Management Department

TIME VALUE OF MONEY

CONCEPTS AND APPLICATION
 • The time value of money refers
to the observation that it is
better to receive money sooner
than later.
• Money that you have in hand
today can be invested to earn
a positive rate of return,
producing more money
tomorrow.
• For that reason, a peso today
is worth more than a peso in
the future.

Ateneo de Zamboanga University | ABM Department 2

 FUTURE VALUE VS PRESENT VALUE
• Future value (FV) is the value at a given future date of an amount placed on
deposit today and earning interest at a specified rate. This found by applying
compound interest over a specified period of time.

• Present value (PV), represents the peso value today of a future amount, or
the amount you would invest today at a given interest rate for a specified time
period to equal the future amount. Financial managers prefer present value to
future value because they typically make decisions at time zero, before the
start of a project.

Ateneo de Zamboanga University | ABM Department 3

 FUTURE VALUE
• Future value of a Single Amount (FV of 1)

𝑭𝑽𝟏 = 𝑷𝑽 × (𝟏 + 𝒓)𝒏

• Notations:
• FV = the future value of the investment at the end of n years
• PV = the present value of the future sum of money
• n = the number of periods until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 4

 PRESENT VALUE
• Present value of a Single Amount (PV of 1)

𝑷𝑽𝟏 = 𝑭𝑽 × (𝟏 + 𝒓)−𝒏

• Notations:
• FV = the future value of the investment at the end of n years
• PV = the present value of the future sum of money
• n = the number of periods until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 5

 FUTURE VALUE
• Future value of a Single Amount (FV of 1)

You deposit Php10,000 today at a bank, due in 3 years, at 10% interest

compounded annually. How much will be your deposit be worth after 3 years?

A. 13,310
B. 13,300
C. 12,100
D. 12,210

Ateneo de Zamboanga University | ABM Department 6

 FUTURE VALUE
• Future value of a Single Amount (FV of 1)

𝑭𝑽𝟏 = 𝑷𝑽 × (𝟏 + 𝒓)𝒏

𝑭𝑽𝟏 = 𝟏𝟎, 𝟎𝟎𝟎 × (𝟏 + 𝟎. 𝟏𝟎)𝟑

𝑭𝑽𝟏 = 𝟏𝟎, 𝟎𝟎𝟎 × 𝟏. 𝟑𝟑𝟏

𝑭𝑽𝟏 = 𝟏𝟑, 𝟑𝟏𝟎

Ateneo de Zamboanga University | ABM Department 7

 ANNUITY
• Annuity

- There are two types of annuities:

- Ordinary Annuity and
- Annuity Due

Ateneo de Zamboanga University | ABM Department 8

 FUTURE VALUE
• Future value of an Ordinary Annuity (FVOA)

𝟏+𝒓 𝒏−𝟏
𝑭𝑽𝑶𝑨 = 𝑪𝑭 ×
𝒓
• Notations:
• FV = the future value of the investment at the end of n years
• CF = the annuity payment deposited or received at the beginning or end of each year
• n = the number of periods until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 9

 FUTURE VALUE
• Future value of an Annuity Due (FVAD)
𝒏+𝟏
𝟏+𝒓 −𝟏
𝑭𝑽𝑨𝑫 = 𝑪𝑭 × −𝟏
𝒓
• Notations:
• FV = the future value of the investment at the end of n years
• CF = the annuity payment deposited or received at the beginning or end of each year
• n = the number of years until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 10

 FUTURE VALUE
• Future value of an Annuity
On January 1, 20x1, ABC Co. issued bonds due in ten years. The bond
indenture requires ABC Co. to set up a sinking fund to be used to settle the
bonds at maturity. ABC Co. decided to make ten annual contributions of
Php10,000 to a sinking fund that earns 12% compounded interest. If ABC Co.
makes the first contribution on December 31, 20x1, how much is the value of
the sinking fund after 10 years?
A. 175,460.52
B. 175,487.40
C. 196,548.20
D. 196,545.80

Ateneo de Zamboanga University | ABM Department 11

 FUTURE VALUE
• Future value of Ordinary Annuity (FV OA)

𝟏+𝒓 𝒏−𝟏
𝑭𝑽𝑶𝑨 = 𝑪𝑭 ×
𝒓
𝟏 + 𝟏𝟐% 𝟏𝟎 − 𝟏
𝑭𝑽𝑶𝑨 = 𝟏𝟎, 𝟎𝟎𝟎 ×
𝟏𝟐%
𝑭𝑽𝑶𝑨 = 𝟏𝟎, 𝟎𝟎𝟎 × 𝟏𝟕. 𝟓𝟒𝟖𝟕𝟒
𝑭𝑽𝑶𝑨 = 𝟏𝟕𝟓, 𝟒𝟖𝟕. 𝟒𝟎

Ateneo de Zamboanga University | ABM Department 12

 FUTURE VALUE
• Future value of an Annuity
On January 1, 20x1, ABC Co. issued bonds due in ten years. The bond
indenture requires ABC Co. to set up a sinking fund to be used to settle the
bonds at maturity. ABC Co. decided to make ten annual contributions of
Php10,000 to a sinking fund that earns 12% compounded interest. If ABC Co.
makes the first contribution on January 1, 20x1, how much is the value of the
sinking fund after 10 years?
A. 175,460.52
B. 175,487.40
C. 196,548.20
D. 196,545.80

Ateneo de Zamboanga University | ABM Department 13

 FUTURE VALUE
• Future value of Annuity Due(FV AD)

𝒏+𝟏
𝟏+𝒓 −𝟏
𝑭𝑽𝑨𝑫 = 𝑪𝑭 × −𝟏
𝒓
𝟏 + 𝟏𝟐% 𝟏𝟎+𝟏 − 𝟏
𝑭𝑽𝑨𝑫 = 𝟏𝟎, 𝟎𝟎𝟎 × −𝟏
𝟏𝟐%
𝑭𝑽𝑨𝑫 = 𝟏𝟎, 𝟎𝟎𝟎 × 𝟏𝟗. 𝟔𝟓𝟒𝟓𝟖
𝑭𝑽𝑨𝑫 = 𝟏𝟗𝟔, 𝟓𝟒𝟓. 𝟖𝟎

Ateneo de Zamboanga University | ABM Department 14

 PRESENT VALUE
• Present value of an Ordinary Annuity (PVOA)

𝟏− 𝟏+𝒓 −𝒏
𝑷𝑽𝑶𝑨 = 𝑪𝑭 ×
𝒓
• Notations:
• PV = the present value of the future sum of money
• CF = the annuity payment deposited or received at the beginning or end of each year
• n = the number of years until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 15

 PRESENT VALUE
• Future value of an Annuity Due (FVAD)
−(𝒏−𝟏)
𝟏− 𝟏+𝒓
𝑷𝑽𝑨𝑫 = 𝑪𝑭 × +𝟏
𝒓
• Notations:
• FV = the future value of the investment at the end of n years
• CF = the annuity payment deposited or received at the beginning or end of each year
• n = the number of years until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 16

 PRESENT VALUE
• Present value of an Annuity
In consideration for services performed, you received a Php10,000 noninterest-
bearing note today which is due in 10 equal annual instalments of Php1,000 each.
Of course, you already know that the Php10,000 face amount includes both principal
and interest elements that should be segregated. Therefore, you will record the note
at its present value. You then determine that the current market rate as of today is
12%. If the first instalment is due immediately today, how much is the initial carrying
amount of the noninterest-bearing note?
A. 6,238.52
B. 6,328.25
C. 5,650.22
D. 5,560.22

Ateneo de Zamboanga University | ABM Department 17

 PRESENT VALUE
• Present value of Annuity Due(PV AD)

𝟏 − 𝟏 + 𝒓 −(𝒏−𝟏)
𝑷𝑽𝑨𝑫 = 𝑪𝑭 × +𝟏
𝒓
𝟏 − 𝟏 + 𝟏𝟐% −(𝟏𝟎−𝟏)
𝑷𝑽𝑨𝑫 = 𝟏, 𝟎𝟎𝟎 × +𝟏
𝟏𝟐%
𝑷𝑽𝑨𝑫 = 𝟏, 𝟎𝟎𝟎 × 𝟔. 𝟑𝟐𝟖𝟐𝟓
𝑷𝑽𝑨𝑫 = 𝟔, 𝟑𝟐𝟖. 𝟐𝟓

Ateneo de Zamboanga University | ABM Department 18

 PRESENT VALUE
• Present value of an Annuity
In consideration for services performed, you received a Php10,000 noninterest-
bearing note today which is due in 10 equal annual instalments of Php1,000 each.
Of course, you already know that the Php10,000 face amount includes both principal
and interest elements that should be segregated. Therefore, you will record the note
at its present value. You then determine that the current market rate as of today is
12%. If the first instalment is due one year from now, how much is the initial carrying
amount of the noninterest-bearing note?
A. 6,238.52
B. 6,328.25
C. 5,650.22
D. 5,560.22

Ateneo de Zamboanga University | ABM Department 19

 PRESENT VALUE
• Present value of Ordinary Annuity(PV OA)

𝟏 − 𝟏 + 𝒓 −𝒏
𝑷𝑽𝑶𝑨 = 𝑪𝑭 ×
𝒓
𝟏 − 𝟏 + 𝟏𝟐% −𝟏𝟎
𝑷𝑽𝑶𝑨 = 𝟏, 𝟎𝟎𝟎 ×
𝟏𝟐%
𝑷𝑽𝑶𝑨 = 𝟏, 𝟎𝟎𝟎 × 𝟓. 𝟔𝟓𝟎𝟐𝟐𝟑
𝑷𝑽𝑶𝑨 = 𝟓, 𝟔𝟓𝟎. 𝟐𝟐

Ateneo de Zamboanga University | ABM Department 20

 PERPETUITY
• A perpetuity is an annuity with an infinite life—in other words, an annuity that
never stops providing its holder with a cash flow at the end of each year
• Present value of a Perpetuity (PV of Perpetuity)

𝑪𝑭
𝑷𝑽∞ =
𝒓
• PV = the present value of the future sum of money
• CF = the annuity payment deposited or received at the beginning or end of each year
• n = the number of years until payment will be received or during which compounding occurs
• r = the annual interest or discount rate

Ateneo de Zamboanga University | ABM Department 21

 PRESENT VALUE
• Present value of a Perpetuity
Marty wishes to endow a chair in finance at his alma mater. The university
indicated that it requires P200,000 per year to support the chair, and the
endowment would earn 10% per year.
A. 2,000,000
B. 20,000,000
C. 200,000
D. 200,000,000

Ateneo de Zamboanga University | ABM Department 22

 PRESENT VALUE
• Present value of a Perpetuity

𝑪𝑭
𝑷𝑽∞ =
𝒓
𝟐𝟎𝟎, 𝟎𝟎𝟎
𝑷𝑽∞ =
𝟏𝟎%
𝑷𝑽∞ = 𝟐, 𝟎𝟎𝟎, 𝟎𝟎𝟎

Ateneo de Zamboanga University | ABM Department 23