FUTURE VALUE
(ANNUAL COMPOUNDING)
Future value (FVn) is equal
to the initial principal
amount (PV), compounded
at the interest rate (i) for
periods (n).
FVn = PV ( 1 + i) n
DETERMINATION OF FUTURE
VALUE
USING A TABLE
Instead of computing the
value of the term ( 1 + i) n,
we can use a table to find
the value.
The value is called the
future value interest factor
or FVIFi,n
FVn = PV (FVIF i,n)
SAMPLE PROBLEMS: FUTURE
VALUES
Ifyou invest P12,000 today, how
much will you have .
1) In 6 years at 7%
2) In 15 years at 12%
3) In 25 years at 10%
4) In 25 years at 10%
(compounded semiannually)
NOMINAL INTEREST RATE VS.
EFFECTIVE INTEREST RATE
Nominal interest rate is simply
the stated rate, such as 10%.
Effective interest rate, also
called the annual percentage
rate or APR, is the true interest
rate and may differ from the
nominal rate depending on the
frequency on compounding.
DETERMINATION OF THE FUTURE VALUE OF A
STREAM OF PAYMENTS (UNEQUAL PAYMENTS)
Calculatingthe future value
of an unequal stream of
payments involves finding
the future value of each
payment at a specified
future date and then
summing these future
values.
DETERMINATION OF THE FUTURE
VALUE OF A STREAM OF PAYMENTS
(EQUAL PAYMENTS)
A stream of equal payments
made at regular time
intervals is an annuity,
sometimes called a fixed
annuity.
There are two types of fixed
annuities: ordinary annuity
and annuity due.
ANNUITY
Ordinary annuity one in which
the payments or receipts occurs
at the end of each period. This is
also called a regular or deferred
annuity.
FVOAn = A (FVIFAi,n)
FVOAn = future value of an ordinary annuity
A = the amount of the fixed annuity payment
FVIFAi,n = future value interest factor of an annuity for
interest rate (i), and time period (n).
SAMPLE PROBLEMS: ORDINARY ANNUITY
Ifyou invest P8,000 per period for
the ff. number of periods, how
much would you have . (use
table 3)
1) 7 years at 9%
2) 40 years at 11%
ANNUITY
Annuity Due - one which
payments or receipts occur at
the beginning of each period.
FVADn = A (FVIFAi,n) ( 1 + i )
FVADn = future value of an
Annuity annuity
due
COMPOUNDING VS
DISCOUNTING
Compounding the
process of going to future
values (FVs) from present
values (PVs)
Discounting the process
of determining the present
value of a future amount
COMPOUNDING VS
DISCOUNTING
Future value determination
compounds money forward in
time to determine its worth in
the future.
Present value determination
discounts money that will be
received in the future back in
time to see what it is worth in
the present.
DETERMINATION OF PRESENT
VALUE
USING A TABLE
PV = FVn ( PVIFi,n)
where PVIFi,n is called a
present value interest
factor
for discount rate i and
time
period n.
SAMPLE PROBLEMS: PRESENT
VALUES
How much would you have to
invest today to receive(use
table 2 and 4)
1) P12,000 in 6 years at 12%
2) P15,000 in 15 years at 8%
)What is the present value of:
1) P8,000 in 10 years at 6%
2) P16,000 in 5 years at 12%
3) P25,000 in 15 years at 8
DETERMINATION OF THE PRESENT VALUE OF
A STREAM OF PAYMENTS (UNEQUAL PAYMENTS)
To find the present value of an
unequal, or mixed stream of
payments, simply calculate
the present value of each
future amount separately and
then add these present values
together.
DETERMINATION OF THE PRESENT VALUE
OF A STREAM OF PAYMENTS (EQUAL PAYMENTS)
The present value of an equal
stream of payments (PVn), can be
calculated using a table, by the
equation:
PVOAn = A (PVIFAi,n)
SAMPLE PROBLEMS: PRESENT
VALUES STREAM OF EQUAL
PAYMENTS
Using the formula in preceding
slide, use table 2 and 4 in
answering the ff:
How much would you have to
invest today to receive.
3) P5,000 each year for 10 years at
8%
4) P40,000 each year for 40 years
at 5%
DETERMINATION OF THE PRESENT
VALUE OF A PERPETUITY
Perpetuity an annuity with
an infinite life; that is, the
payments continue
indefinitely. The present
value of a perpetuity is found
by using the equation:
PV of a perpetuity = Annuity
(A) / Discount rate (i )
