UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

BASIC FINANCIAL PLANNING

Module 3

TIME VALUE OF
MONEY

Rica Mae N. Dela Cruz

FMGT- 4B
Topic 1

UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

TIME VALUE OF MONEY

What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present
time is worth more than the same amount in the future due to its potential earning
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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

capacity. This core principle of finance holds that, provided money can earn
interest, any amount of money is worth more the sooner it is received. TVM is
also referred to as present discounted value
some standard calculations based on the time value of money are:

UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Present value: The current worth of a future sum of money or stream

of cash flows, given a specified rate of return. Future cash flows are
"discounted" at the discount rate;the higher the discount rate, the lower the
present value of the future cash flows. Determining the appropriate discount

UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

rate is the key to valuing future cash flows properly, whether they be earnings
or obligations

Present value of an annuity: An annuity is a series of equal payments or

receipts that occur at evenly spaced intervals. Leases and rental payments
are examples. The payments or receipts occur at the end of each period for
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COLLEGE OF BUSINESS AND ACCOUNTANCY

an ordinary annuity while they occur at the beginning of each period for an
annuity due.
Present value of a perpetuity is an infinite and constant stream of identical
cash flows.

UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Future value: The value of an asset or cash at a specified date in the

future, based on the value of that asset in the present.

Future value of an annuity (FVA): The future value of a stream of

payments (annuity), assuming the payments are invested at a given rate
of interest.
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COLLEGE OF BUSINESS AND ACCOUNTANCY

There are several basic equations that represent the equalities listed above.
The solutions may be found using (in most cases) the formulas, a financial
calculator or aspreadsheet. The formulas are programmed into most financial
calculators and several spreadsheet functions (such as PV, FV, RATE, NPER,
and PMT).

UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Formula
The following formula use these common variables:

PV is the value at time=0 (present value)

FV is the value at time=n (future value)

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COLLEGE OF BUSINESS AND ACCOUNTANCY

A is the value of the individual payments in each compounding period

n is the number of periods (not necessarily an integer)

i is the interest rate at which the amount compounds each period

g is the growing rate of payments over each time period

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COLLEGE OF BUSINESS AND ACCOUNTANCY

Future value of a present sum

The future value (FV) formula is similar and uses the same variables.

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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Present value of a future sum

The present value formula is the core formula for the time value of money;
each of the other formulae is derived from this formula. For example, the
annuity formula is the sum of a series of present value calculations.

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COLLEGE OF BUSINESS AND ACCOUNTANCY

The present value (PV) formula has four variables, each of which can be
solved for:
The cumulative present value of future cash flows can be calculated by
summing the contributions of FVt, the value of cash flow at time t

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COLLEGE OF BUSINESS AND ACCOUNTANCY

Note that this series can be summed for a given value of n, or when n is
his is a very general formula, which leads to several important special
cases given below.

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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Formula table
The following table summarizes the different formulas commonly used in
calculating the time value of money.These values are often displayed in tables
where the interest rate and time are specified.

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COLLEGE OF BUSINESS AND ACCOUNTANCY

Find

Given

Formula
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COLLEGE OF BUSINESS AND ACCOUNTANCY

Future value (F)

Present value (P)

Present value (P)

Future value (F)

Repeating payment

Future value (F)

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COLLEGE OF BUSINESS AND ACCOUNTANCY

(A)

Repeating payment
Present value (P)
(A)

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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Future value (F)

Repeating payment (A)

Present value (P)

Repeating payment (A)

Future value (F)

Gradient payment (G)

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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

Present value (P)

Gradient payment (G)

Fixed payment (A)

Gradient payment (G)

Future value (F)

Exponentially increasing payment

(for i g)

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COLLEGE OF BUSINESS AND ACCOUNTANCY

(D)
(for i = g)
Increasing percentage (g)
Present value (P)

Exponentially increasing payment

(for i g)

(D)

(for i = g)
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COLLEGE OF BUSINESS AND ACCOUNTANCY

Increasing percentage (g)

Notes:

A is a fixed payment amount, every period

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COLLEGE OF BUSINESS AND ACCOUNTANCY

G is a steadily increasing payment amount, that starts at G and increases

by G for each subsequent period.

D is an exponentially or geometrically increasing payment amount, that

starts at D and increases by a factor of (1+g) each subsequent period.

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COLLEGE OF BUSINESS AND ACCOUNTANCY

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COLLEGE OF BUSINESS AND ACCOUNTANCY

CASE APPLICATION :
1. Calculate wthat the $3,000-per-year-deficit, had it been invested, would have
amounted to at the end of the 15-year period.

A=P(1+r)1
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COLLEGE OF BUSINESS AND ACCOUNTANCY

A=$3,000(1+.07)
A=$8277.0946221459 or $8277.09
2. Explain to George what compounding is and how it affected the cumulative
amount received in question1.

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COLLEGE OF BUSINESS AND ACCOUNTANCY

Compund interest is interest added to the principal of a deposit or loan

so that the added interest also earns interest from them on. This
addition of interest to the principal is called compounding.

3. Calculate the return on the proposed $20,000 investment and indicate the
factors entering into your recommendation to accept or reject it.
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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

FVn
R= PV )ve -1

$ 70,000
R=( $ 20,000

1/20

-1

R=6.46%
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COLLEGE OF BUSINESS AND ACCOUNTANCY

4. Indicate the expected return on the annuity and whether it should be accepted
or rejected.

R= 6.46%

rejected

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UNIVERSITY OF CALOOCAN CITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

5. Construct an explanation of the time value of money for the financial plan
using your answers to question 1 through 4 in his part of the financial plan to
help you communicate the time value information to George and Laura.

The time value of money (TVM) is the idea that money available at the
present time is worth more than the same amount in the future due
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COLLEGE OF BUSINESS AND ACCOUNTANCY

tonits potential earning capacity. Because if he would invest his money

amounting to $20,000 for 20 years it will only amount to $70,000 in the
future while there is annuity that George could sign up amounting
$8,000 for 17 years and give $100,000 in the future

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