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Time Value of Money: BY: Dr. Isaias L. Borres

The document discusses the Time Value of Money, emphasizing that money available now is worth more than the same amount in the future due to potential earning capacity. It covers concepts of simple and compound interest, annuities, and provides formulas and examples for calculating interest and future values. Additionally, it highlights the importance of these concepts in financial management and investment decision-making.

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33 views45 pages

Time Value of Money: BY: Dr. Isaias L. Borres

The document discusses the Time Value of Money, emphasizing that money available now is worth more than the same amount in the future due to potential earning capacity. It covers concepts of simple and compound interest, annuities, and provides formulas and examples for calculating interest and future values. Additionally, it highlights the importance of these concepts in financial management and investment decision-making.

Uploaded by

Desktop Account
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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TIME VALUE OF MONEY

BY: Dr. Isaias L. Borres


OBJECTIVES:

• Concept of Time Value of Money


• Simple Interest
• Compound Interest
• Annuity
Time Value of Money
• The idea that money available at the present time
is worth more than the same amount in the future
due to its potential earning capacity.

• It is an important concept in financial


management. It can be used to compare
investment alternatives and to solve problems
involving loans, leases, savings.
Reasons:
 Risk & Uncertainty
 Inflation
 Consumption
 Investment Opportunities
Time Lines
• In a business, is a graphical
representation of timing of cash
flows.
Time Lines
Inter
est
Rate
Time 0 1 2 3
Periods
5%

FV

PV – Present Value
FV – Future Value
Interest
• The amount earned when money is
loaned to someone else or in invented in
a financial product that promises
earnings after a certain period of time.
TYPE OF INTEREST
 Simple Interest

 Compound Interest
Simple Interest
 Interest paid (earned) on only the
original amount, or principal, borrowed
(lent).
 It is when the interest on a loan or
investment is calculated only on the
amount initially invested or loaned.
FORMULA Simple Interest

Interest Earned
I = Prt
P = principal r = interest rate t = time in year
EXAMPLE:
1. A 2-year loan of $500 is made with 4% simple interest. Find
the interest earned.

2. Sarah deposits P4,000 at a bank at an interest rate of 4.5%


per year. How much interest will she earn at the end of 3
years?

3. A total of $1,200 is invested at a simple interest rate of 6%


for months. How much interest is earned on this
investment?
Now apply the formula:
I=Prt
=$500(0.04)(2)
=$40

Answer: The interest


earned is $40.
Now apply the
formula:
I=Prt
=₱4000 (0.045)(3)
=₱540
Answer: The
interest earned is
Now apply the
formula:
I=Prt
=$1,200 (0.06)(1/3)
=$24
Answer: The interest
earned is $24.
FORMULA FUTURE VALUE
OF SIMPLE INTEREST

A = P(1 + rt)
P = principal r = interest rate t = time in year
FUTURE VALUE
OF SIMPLE INTEREST

 A business takes out a simple


interest loan of $10,000 at a rate of
7.5%. What is the total amount the
business will repay if the loan is for 8
years?
Now apply the formula:
Using the simple interest formula
for future value:

A = P(1+rt)
= 10000 (1+0.075(8))
A = $16,000

Answer: The business will pay back


a total of $16,000.
Compound Interest
 When interest is earned not only on the
initial amount invested, but also on any
interest.
Compound Interest
 When interest is earned not only on the
initial amount invested, but also on any
interest.
 If the interest is calculated more than
once per year.
Compound Interest
 When interest is earned not only on the
initial amount invested, but also on any
interest.
 If the interest is calculated more than
once per year.
FORMULA Compound Interest
Compound Interest
• Annually – once a year
• Semi-annually – twice a year
• Quarterly – 4 times a year
• Monthly – 12 times a year
• Weekly – 52 times a year
• Daily – 365 times a year
EXAMPLE:
1. An investment earns 3% compounded monthly.
Find the value of an initial investment of
$5,000 after 6 years.

2. What is the value of an investment of $3,500


after 2 years if it earns 1.5% compounded
quarterly?
Now apply the formula:
A=P(1+r/m)
=$5000(1+0.03/12)
= $5000 (1.0025)
= $5984.74
Answer: The value
after 6 years will be
Now apply the formula:
A=P(1+r/m)
=$3500(1+0.015/4)
= $3500 (1+0.00375)
= $3606.39
Answer: The value after 2
years will be $3,606.39
Annuity

 Series of payments made at


equal intervals.
EXAMPLES:
• Regular Savings Account
• Mortgages
• Car payments
• Rent
• Pension
• Insurance
Ordinary Annuity
 Payments are always made at the
end of each interval.
Ex:
o Semi-annual interest payments on bonds
o Quarterly or annual dividend payments
Present Value of Ordinary Annuity

P = payment i = interest rate


n = number of payments
sent Value
of Ordinary Annuity

 If an ordinary annuity pays $50,000 per


year for five years and the interest rate is 7
percent, the present value would be?
sent Value
of Ordinary Annuity
[1-(1+0.07)^ -
5]
PVo = $50,000 —————–
0.07

PVo =
$205,010
Future Value of Ordinary Annuity

P = payment i = interest rate


n = number of payments
ture Value
of Ordinary Annuity

 The treasurer of ABC International expects to invest $100,000


of the firm's funds in a long-term investment vehicle at the end
of each year for the next five years. He expects that the
company will earn 7% interest that will compound annually. The
value that these payments should have at the end of the five-
year period.
ture Value
of Ordinary Annuity
[(1+0.07) - 1]
FVo = $100,000
0.75

FVo =
$575,074
Annuity Due

 Payments occur at the beginning


of the payment period
Present Value of Annuity Due

P = payment i = interest rate


n = number of payments
nt Value
of Annuity D
 ABC International is paying a third party
$100,000 at the beginning of each year for
the next eight years in exchange for the
rights to a key patent. What would it cost
ABC if it were to pay the entire amount
immediately, assuming an interest rate of
5%?
nt Value
of Annuity D

[1-(1+0.05)^- 8]
PVdue = $100,000
(1+0.05)
0.05
PVdue =
$678,637.34
Future Value of Annuity Due

P = payment i = interest rate


n = number of payments
e Value
of Annuity D
 Suppose you want to save money for your
child’s college expenses. Let’s suppose
you deposit 1000 at the beginning of each
year, for 18 years, at an interest rate of
5%. How much is available for your child
when he/she starts school?
e Value
of Annuity D
[(1+0.05)^18 - 1]
FVdue = $1000
(1+0.05)
0.05

FVdue =
$29539.00
Reference:

https://
www.mathbootcamps.com/
compound-interest-formula/
Problem:
1. Accumulate P300,000 for eight years at 7%
compounded quarterly. How much is the interest?

2. What is the simple interest on P30,000 for six months

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