Time Value of

Money
 Table of contents.
01 | Simple 02 | Maturity 03 | Compound
Interest Value Interest

04 | FV of 05 | FV of an 06 | FV of an 07 | PV of an
Single Ordinary Annuity Due Ordinary
Payment Annuity Annuity

08 | PV of an 09 | PV of a 10 |
Annuity Due Perpetuity Discounting
Time Value of Money
The Time Value Of Money (TVM) is the concept that money
you have now is worth more than the identical sum in the
future due to its potential earning 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.
 SIMPLE INTEREST
The interest on the amount invested or
borrowed at a given rate and for a given
time.

I = PxRxT
P - principal
R - rate
T - time

4
Sample:
Q: How much is the interest
expense of a 3 month Notes
Payable worth P20,000, with a
stated interest rate of 5%? How
much is its Maturity Value?
A1: P20,000 x 0.05 x (3/12) = P250
interest expense
A2: P20,000 + P250 = P20,250 is
the maturity value
Julio borrowed $1,100 from Maria five
months ago. When he first borrowed the
money, they agreed that he would pay
Maria 5% simple interest. If Julio pays her
back today, how much interest does he
owe her?
P = $1,100; r = 5%; per year; t = 5 months
I= P× r × t
= 1,100×.05×5/12
= $22.92
 MATURITY VALUE
Amount computed by adding the interest and the principal

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MV = I + P
MV - maturity value

I - interest

P - principal
Sample:
Mikay is working at a fine dining
restaurant and earns a principal amount of
₱25,000 this summer. She decides to invest
this money in a high-yield savings account
that offers an interest rate of 5% per year.
After 3 years, the interest earned on her
investment amounts to ₱3,750 .

What will be the maturity value of Mikay's

investment when she is ready to buy a new
laptop for Mommy Oni?
Answer:
From the problem, we have:
Principal = ₱25,000
Interest earned = ₱3,750

Maturity Value = Principal + Interest

Maturity Value = ₱25,000 + 3,750 = ₱28,750

 COMPOUND INTEREST
Is when interest earned in the first period will also earn interest in
the second period

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 nt
A=P(1 + r/n)
A - final amount t - time

P - principal n - number of times

Interest is compounded
r - interest rate n= 1 (anually)
n= 2 (semi-anually)
n= 4 (quarterly)
n= 12 (monthly)
Sample:
If an amount of ₱5,000 is deposited
into a savings account at an annual
interest rate of 5%, compounded
monthly, the value of the investment
after 10 years is?
Answer:
A= P (1+r/n)nt

A= 5,000 (1+0.05/12)(12)(10)

A= 8,235.05
FUTURE VALUE OF A SINGLE PAYMENT
FUTURE VALUE the amount which you will receive sometime in
the future or the amount to which an investment will grow after
earning interest.

t
FV = PVx(1+r)
FV = Future value or Maturity Value r = rate per period

PV= Present Value or Principal t = time or number of periods

FUTURE VALUE OF A
SINGLE PAYMENT
Sample:

• Q: Batstateu Co. invested P20,000 in a

savings account earning 5% interest
every year. What is its Future Value four
years from now?
 4
FV = 20,000 × (1 + 0.05)
= 24,310.13
FUTURE VALUE OF A SINGLE PAYMENT

t
PV = FV/(1+r)
FV = Future value or Maturity Value r = rate per period

PV= Present Value or Principal t = time or number of periods

FUTURE VALUE OF A
SINGLE PAYMENT
Sample:
Q: Batstateu Co. intends to purchase land
worth P24,310.13. According to the owner of
the land, four years from now they would
only sell the lot to prospective buyers.
How much cash does Batstateu Co. need to
place in a bank today to have enough cash
to buy the property? Suppose the bank can
give 5% interest.
FUTURE VALUE OF A SINGLE PAYMENT

Sample:
ANSWER:

PV = 24,310.13
(1+0.05)4

= 20,000
FV OF AN ORDINARY ANNUITY
Annuity Ordinary Annuity
Sequence of equal When periodic
payments made at payments are made
regular intervals at the end of the
period

Future Value of an Ordinary Annuity

The sum of all the accumulated value of the set
of payments due at the end of the period.
 n
(1 + i) - 1
FVoa =Px [
i ]
P - payment made at regular intervals
i - interest
n - number of payments
FV OF AN ORDINARY ANNUITY
Q: Eun Woo intends to save a small portion of his
salary on a bank account every year for three
years. The annual amount of P10,000 will be
deposited with a bank that pays 5% of interest
each year.

How much will be the amount accumulated at the

bank if the first payment will be made at the end of
the first year? / What is the future value of
P10,000 payments that will be made to a bank at
the end of each year for three years at an
interest rate of 5%?
 3
FVoa = 10,000 × (1 + 0.05) -1
0.05

= 31,525.00
FUTURE VALUE OF AN
ANNUITY DUE
ANNUITY DUE when the first FV OF ANNUITY - the sum of the
payment happens immediately accumulated values of the
or when payments are made at payments at the end of the
the beginning of each period. term, with the first payment to
be made at the beginning of a
period.

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 n
FVad = P x [ (1 + i) - 1
i ] (1+i)
P - payment made at regular intervals

i - interest

n - number of payments
PRESENT VALUE OF AN ORDINARY ANNUITY
Amount of all the discounted value of the multiple payments due at
the start of the contract, with the first payment due at the end of
the period.

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 -n
[ ]
1 - (1 + i)
PVoa = P x i
P - payment made at regular
intervals/payment per period

i - interest

n - number of payments
 -n
[ ]
1 - (1 + i)
PVoa = P x i
D - Deadline of the first payment
I - Interest rate
P - Payment per period
P - Period
PRESENT VALUE OF
ORDINARY ANNUITY
Sample:
Q: Ms. OA intends to save a small portion of her
salary on a bank account every year for three
years. The annual amount of P10,000 will be
deposited with a bank that pays 10% of interest
each year.
How much is the discounted value of the three
year payments if the first payment will be made
at the end of the first year? / Compute for the
Present Value of an Ordinary Annuity
 -3
PVoa = 10,000 × 1 - (1 + 0.1)
0.1

= 24,868.52
PRESENT VALUE OF
ORDINARY ANNUITY
Sample:
Q: On December 31, 2021, the entity sold an
equipment costing 3,000,000 in exchange
for a P2,500,000 noninterest bearing note
requiring five annual payments of P500,000.
The first payment was made on December
31, 2022. The market interest rate for similar
note was 8%.
Compute for the Present Value of Annuity.
 -5
PVoa = 500,000 × 1 - (1 + 0.08)
0.08

= 1,996,355.02
PRESENT VALUE OF
ORDINARY ANNUITY
Sample:
Q: On December 31, 2024, Due Company sold
a machine in the ordinary course of
business to Blue Company in exchange for a
noninterest bearing note requiring ten
annual payments of P1,000,000.
The entity made the first payment on
December 31, 2024. The market interest rate
for similar notes at date of issuance was
8%. Compute for the present value of
ordinary annuity.
 Answer: 0
Present Value of Ordinary
Annuity was not applicable in
the problem as the first
payment was made in
beginning of the period.
 PRESENT VALUE OF AN ANNUITY DUE
Sum of all the discounted value of several payments due at the
beginning of the term, with the first payment to be made at the
beginning of a period.

36
 -n

PVad = P x [ 1 - (1 + i)
i ]
(1+i)
P - payment made at regular
intervals/payment per period

i - interest

n - number of payments
PRESENT VALUE OF
ANNUITY DUE
Sample:
Q: On December 31, 2025, Due Company sold a
machine in the ordinary course of business to
Blue Company in exchange for a noninterest
bearing note requiring ten annual payments of
P1,000,000.
The entity made the first payment on December
31, 2025. The market interest rate for similar
notes at date of issuance was 8%. / Compute
for the Present Value of Annuity Due.
PVad = 1,000,000 × 1 - (1 + 0.08) -10
X 1.08
0.08

= 7,246,887.91
PRESENT VALUE OF
ORDINARY ANNUITY DUE
Sample:
Q: Eun Woo intends to save a small portion of his
salary on a bank account every year for three
years. The annual amount of P10,000 will be
deposited with a bank that pays 10% of interest
each year.
How much is the discounted value of the three
year payments if the first payment will be made
at the start of the first year? / Compute for the
Present Value of Annuity Due.
PVad = 1,000,000 × 1 - (1 + 0.10) -3
X 1.10
0.08

= 27,355.37
 09 PV of a Perpetuity
Perpetuity considered a form of
annuity. Yet, they differ from the mode of
payment since payments in perpetuity
are considered continuous forever.
Sample
Q: If you want to get the present value of
infinite P100,000 payments every year at
5% interest rate, just divide 100,000 by
5% and you will get P2,000,000.
 DISCOUNTING
The process of determining the present value of a payment or a
stream of payments that is to be received in the future.

Discounting is the primary factor used in pricing a stream of

tomorrow's cash flows (Chen & Scott, 2020).

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DISCOUNTING OF NOTES

1. Discounting the company’s own note (note

payable)
2. Discounting the customer’s note (note receivable)
 Discounting the Company’s Own
Note (Note Payable)
In this kind of borrowing arrangement, the
Company is willing to receive a lesser amount from
the investor (bank) even though they will pay the
whole amount of the face value at the date of
maturity.

The difference between the cash proceeds and the

face value/maturity value is called "Discount on
Notes Payable". The Discount on Notes Payable will
be amortized using the effective interest method
over the borrowing period.
Illustration:
On January 1, 2024, the company got a loan from a
bank. As an assurance, they gave a non-interest
bearing promissory note, with a face value of
P100,000, The face value of the note will be paid in
full after 3 years. The prevailing interest rate for
this kind of transaction is 2%.

Q1: What is the amount of cash received by the

Company from the bank?
Illustration:

A: In order to get the amount of cash received by

the Company, get the present value of the face of
the note. By using the PV of ordinary annuity, you
will arrive at:

PV = 94,232.23 = Cash Received

Illustration:
Q2: What is the amount of Discount of Notes
Payable?

A: 100,000 – 94,232.23 = 5,767.76

Q3: How much is the interest expense for the year

2024?

A: 94,232.23 x .02 = 1,884.64

 Discounting the Company’s Own
Note (Note Receivable)
This is an example of Receivable Financing . This is
endorsing a promissory note of a customer to a
bank or a financing company, the latter advancing
the maturity value of the note less a charge called
discount. A company that discounts a customer’s
note receivable at the bank is in essence selling the
note to the bank.
Illustration:
On January 1, 2024, the company was short in
cash. In order to solve this liquidity problem, they
discounted the 90 day, 5% P100,000 note from a
customer at PNB at a discount rate of 20%.

This note is dated November 1, 2023 and was

received from a customer on this said date.

Q1: What is the amount of the Principal?

Illustration:

A: The amount of the principal is P100,000. It is the

amount stated on the face of the note. It is also
known as face value.

Principal = face value of the note

Principal = P100,000
 Illustration:
Q2: What is the amount of interest that will be
earned for the 90 day period of the note?

Interest = Principal x interest rate x period

Interest = P100,000 x 0.05 x 90/360

Interest = P1,250

This is the amount of interest that will be earned

for the entire term of the note.
 Illustration:
Q3: What is the maturity date of the note?

A: The maturity date of the note is January 31,

2024. It is the date when the note is due and
payable. 90 days from November 1, 2023 is
January 31, 2024.
 Illustration:

Q4: What is the maturity value of the note?

A: Maturity value of the note = Principal + Interest

Maturity value of the note = P101, 250

 Illustration:

Q5: What is the discount rate?

A: The given discount rate is 20%. This is the rate

of interest used by the bank in computing the
discount.
 Illustration:
Q6: What is the discount period?

A: The discount period is for 30 days. It is the

period from the time of discounting to the date of
maturity.

January 31 - January 1 = 30 days

 Illustration:

Q7: What is the amount of the discount?

A: The discount amounted to P5,555.56.

Thank you!
Do you have any questions?