Time Value

of
Money

Prepared by: Rionel Kristian L. Zarate,

C.P.A, C.T.T.
What is Interest?
• Defined as the cost of using money over time.
• Excess of resources (usually cash) received or paid over the amount of
resources loaned or borrowed.
2 Major Concepts of Time Value of Money
• Future Value
• Present Value
Simple Interest

• The product of Principal amount multiplied by the period’s interest rate

(a one year rate in standard).
How much is the Interest?
I = P x R xT

Where:
I = Interest
P = Principal
R = Rate or Interest Rate
T = Time Period
Compound Interest
• is the Interest paid both on Principal and the amount of Interest
accumulated in prior periods.
• Compounding – the process of determining future value when compound
interest is applied.
Simple Interest Versus Compound Interest
• Simple Interest – based on initial Principal only.
• Compound Interest – based on Principal + Interest accumulated
Future Value (Annual Compounding)
Future Value Using a Table (FV Interest Factor)
FV – Unequal Payments
• Legend Firm plans to deposit • FV4 = (Php2,000)(1.10)4 +
Php2,000 today and Php1,500
one year from now at Moonton (Php1,500)(1.10)3
Rural Bank. No future deposits or
withdrawals are made and the = (Php2,000)(1.464) +
bank pays 10% interest
compounded annually. How (Php1,500)(1.331)
much is the future value of the
account at the end of 4 years? = Php2928 +Php1996.50
= Php4,924.50
FV - Equal Payments
1. Ordinary Annuity – payments or
receipts occur at the END of each
period
Formula:
FVOAn = A(FVIFAi,n)
FVOAn = Future Value of Ordinary
Annuity
A = amount of fixed annuity
payment
FVIFAi,n = future value interest
factor of an annuity for
interest (i) and time period (n)
FV – Equal Payments – Ordinary Annuity

• Legend Firm deposits Php1,000 • FVOA3= (Php1,000)(FVIFA0.10,3)

at the end of each three = (Php1,000)(3.310)
consecutive years in a bank = Php3,310.00
account paying 10% interest
compounded annually. How
much is the Value of the Account
at the end of the 3rd year?
FV - Equal Payments
2. Annuity Due – payments or
receipts occur at the BEGINNING of
each period
Formula:
FVADn = A(FVIFAi,n)(1+i)
FVOAn = Future Value of Annuity
Due
A = amount of fixed annuity
payment
FVIFAi,n = future value interest
factor of an annuity for
interest (i) and time period (n)
(1+i) = Future Value for 1 Period
FV – Equal Payments – Annuity Due
• Legend Firm deposits Php1,000 • FVAD3=
at the beginning of each year for
3 years. Interest is compounded (Php1,000)(FVIFA0.10,3)(1.10)
annually at 10%. How much is = (Php1,000)(3.310)(1.10)
the Value of the Account after 3
years? = (Php1,000)(3.641)

=Php3.641
Present Value
• Current value of a future amount
of money, series of payments
• Discount Rate a.k.a. required rate
of return, used to find present
value
• Discounting - process of
determining PV of future amount
Answers the questions:
• How much do I have to invest
today to have some amount in the
future?
• What is the current value of an
amount to be received in the
future?
Present Value Formula:

FV = PV(1 + r)t
• Rearrange to solve for PV

PV = FV / (1+r)t
or

PV = FV(1+r)-t
Add a Slide Title - 1
Present Value

• Mythic Firm expects to receive • PV= Php1,100

Php1,000 one year from now.
What is the present value of this (1.10)1
amount if the discount rate is at = Php1,000
10%?
Present Value – Using Table

• Mythic Firm expects to receive • PV= (Php1,000)(0.621)

Php1,000 5 years from now. What
is the present value of this • = Php621.00
amount if the discount rate is at
10%?
Present Value – Equal Payments

• Mythic Firm expects to receive • Substitute i=0.10, n=3 and A= ₱1,000

Php1,000, at year’s end for the
• PVOA3=(₱1,000)(PVIFA 0.10,3)
next 3 years. What is the present
value of this stream of payments =(₱1,000)(2.487)
if the discount rate is at 10%?
= ₱2,487

PVOAn=A (PVIFA i,n)