TIME VALUE OF MONEY

A. Future Value of a Single Sum

Formula into : FV = PV x FVIF

FVIF = Future Value Interest Factor (from Tables)

Ex : 1. Calculate the future value of a $500 investment at the end of ten years if it earns an
annually compounded rate of return of 7%!

Answer : n = 10 years, PV = $500, r=7%

FV = PV x FVIF

= $500 x 1.96715

= $983,575

2. Fifteen years from now, you plan to send your daughter to study overseas at Harvard
University, USA. Currently, the total tuition fees for bachelor program is $160,000. Assumsing a
constant one percent inflation rate every year in US, how much the projected total tuition fees for
your daughter 15 years from now?

Answers : PV = $160,000, r = 1%, n = 15 years

FV = $160,000 x 1,16097

= $185,755.20

B. Present Value of a Single Sum

The Present value of a single sum is today’s value of a cash flow that is to be received at some
point in the future.

Formula into : PV = FV x PVIF

PVIF = Present Value Interest Factor (from Tables)

Example : 1. Given a discount rate of 8%, calculate the present value of a $10,000 cash flow that
will be received in seven years!

Answers : r = 8%, FV = $10,000, n=7 years

PV = FV x PVIF

= $10,000 x 0.58349

= $5,834.90

2. You got an offer from a pension insurance agent that if you participate now and continuously
pay your monthly pension payment for the next ten years, by the time you retire fifteen years
from now, you will get a IDR 30,000,000 retirement income every month for twenty years until
you reach age 75.

Now, you want to make sure if this monthly retirement income (IDR 30,000,000 per month) is
enough to cover your future living expenses. You want to calculate how much monthly
retirement income is worth today. If you use a ten percent annual discount rate, what is the
present value of the IDR 30,000,000 retirement income that you will get fifteen years from now?

Answers : n= 15 years, FV = IDR 30,000,000, r= 10%

PV = FV x PVIF

= IDR 30,000,000 x 0.23939

= IDR 7,181,700

Annuity

An annuity is a stream of equal cash flows that occurs at equal intervals over a given period.
Receiving $5,000 per year at the end of each of the next ten years is an example of an annuity.
 A. Future Value of an Annuity

The formula for the future value of an annuity is :

FVA = ANN x FVIFA

Where ;

FVA = Future Value (of an Annuity)

ANN = Annuity (a stream of equal cash flows)

FVIFA = Future Value Interest Factor (of an Annuity)

Example : What is the future value of an ordinary annuity that pays $100 per year at the end of
each of the next 20 years, given the investment is expected to earn an 8% rate of return?

Answers: Ann = $100 per year, n = 20 years, r = 8%

FVA = $100 x 45,76196

= $ 4576,196

2. If you deposit $1,000 in the bank today and $1,000 at the beginning of the next three years,
how much will you have four years from today at 6% compound interest?

Answers :

1. First, we calculate the future value (four years from now) of the first cash flow using
FVIF Table (n=4, r=6%, PV = $1,000)
FV = PV x FVIF = $1,000 x 1.26248
= $1,262.48
2. Then, we calculate the future value of the next three cash flow using FVIFA Table (n=3,
r=6%, Ann = $$1,000)
FVA = Ann x FVIFA
= $1,000 x 3.1836 = $3,183.60
 3. This FVA at the end of year 3 will get interest for one more year at 6%, using FVIF table
(n=1 year, PV = $3,183.60, r = 6%)
FV = $3,183.60 x 1.06
= $3,374.616
4. And finally, we added this amount with the first cash flow :
$1,262.48 + $3,374.616 = $4,637.096

B. Present Value of an Annuity

The formula is : PVA = ANN x PVIFA

Where :

PVA = Present Value of an Annuity

ANN = Annuity (a stream of equal cash flows)

PVIFA = Present Value Interest Factor of an Annuity

Example : 1. What is the present value of an annuity that pays $3,000 per year at the end of each
of the next 12 years, given a 7% discount rate?

Answers : PVA = $3,000 x 7.94269

= $ 23,828.07

2. Given a discount rate of 9%, what is the present value of a 3-year annuity that makes a series
of $500 payments at the beginning of each of the next three years, starting today?

Answers : 1. We calculate the last two cash flows using a PVIFA Table

N = 2 years, r = 9%, Ann =$500

PVA = $ 500 x 1.75911

= $879.55

2. add it to the first cash flow :

PV = $500 + $879.55 = $1,379.555

C. Present Value of a Perpetuity

This Formula is : PV perpetuity = PMT/ r

Example : 1. Assume the preferred stock of ABC Corporation pays $7.00 per year in annual
dividends and plans to follow this dividend policy forever. Given a 6% rate of return, what is the
value of ABC’s preferred stock?

Answer : PV perpetuity = $7.00 / 0.06 = $116.67

Thus, if an investor requires a 6% rate of return, the investor should be willing to pay $116.67
for each share of ABC’s preferred stock.

D. Effective Annual Rate

Effective annual rate (EAR) is the annual rate of return actually being earned after adjustments
have been made for different compounding periods.

This formula is : EAR = (1+periodic rate)^m – 1

Where : periodic rate = stated annual rate / m

m= the number of compounding period per year

Example :

Suppose a bank offers you an automobile loan at an annual percentage rate (APR) of 12% with
interest to be paid monthly. What is the effective annual rate (EAR) on your loan?

Answer : EAR = (1 + 12%/12)^12 – 1

= (1.01)^12 – 1

= 12.68%
 Kasus Time Value of Money

1. Biaya kuliah program S2 saat ini adalah Rp 100.000.000. Anda hendak

mempersiapkan uang untuk biaya kuliah S2 anak Anda sepuluh tahun dari sekarang.
Asumsikan biaya kuliah akan naik sebesar 5% setiap tahun dari tahun sebelumnya.

Pertanyaan :

A. Berapakah perkiraan biaya kuliah S2 sepuluh tahun dari sekarang?

B. Dengan menggunakan tingkat suku bunga tabungan 12% per tahun, berapakah jumlah
uang yang harus anda tabung per bulan di setiap akhir bulan selama sepuluh tahun ke
depan agar anda dapat membayar biaya kuliah S2 anak anda?

Jawab :

A. N = 10 tahun, PV = Rp 100.000.000, r = 5%
FV = PV x FVIF
= 100.000.000 x 1,62889
= Rp 162.889.000
B. r = 12% per tahun (1% perbulan), n = 10 tahun (120 bulan).
FVA = Ann x FVIFA
162.889.000 = Ann x 230,0387
Ann = Rp 708.093,89

2. Anda akan pension lima belas tahun lagi. Anda ingin pada saat pension nanti, anda
mempunyai uang pensiun sebesar Rp 30.000.000 per bulan di setiap akhir bulan
selama dua puluh tahun.
Dengan menggunakan asumsi suku bunga 12% per tahun untuk setiap situasi (baik
untuk menghitung present value maupun future value), berapakah besarnya uang
dengan jumlah yang sama yang harus Anda tabung per bulan di setiap akhir bulan
selama 15 tahun ke depan untuk memenuhi kebutuhan uang pensiun Anda?
Jawab.
A. Ann = Rp 30.000.000, N = 20 tahun / 240 bulan, r = 12% per tahun / 1% per
bulan
PVA = Ann x PVIFA
= Rp 30.000.000 x 90,81942
= Rp 2.724.582.600
B. FVA = Rp 2.724.582.600, N = 15 tahun / 180 bulan, r = 12% per tahun / 1% per
bulan
FVA = Ann x FVIFA
Rp 2.724.582.600 = Ann x 499,58020
Ann = Rp 5.453.744
 LOAN PAYMENT & AMORTIZATION
1. John Doe plans to borrow $500,000 for five years to pay for his new home.
The bank will lend the money at a rate of 12% and requires that the loan be
paid off in five equal of year payments. Calculate the mount of the payment
that he must make in order to fully amortize this loan in five years!
Answers : N =5 Years, r=12%, PVA = $500,000
PVA = Ann x PVIFA
$500,000 = Ann x 3.60478
Ann = $138,704.72

2.