TIME VALUE OF

MONEY
Future Value and Present Value
 Learning Objectives

At the end of this lesson, you will be able to:

1. State the formula to compute for present and future
values; and
2. Calculate future value and present value of money.
Would it be better to save for your
retirement fund at ₱ 500/ month
starting today or at ₱ 1, 000/month
starting 2030?
 Consider the case of Lola Clara. When she was 24 years old, her
Papa gave her ₱50,000. She was very happy and was immediately
planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not
wanting to disappoint her Mama, she invested her money in a bank
time deposit with an interest rate of 5% at that time.
Lola Clara became a very successful career woman but she
somehow forgot that she placed ₱50,000 in the bank. She suddenly
remembered and was shocked at what had happened to her money
after 50 years.

It is now valued at 50,000 x (1.05)50 = 573,369.99.

 How can
we say that
money has
a time
value?
“a PESO
received today
is worth more
than a PESO
to be received
tomorrow”
 0 1 2 3 4 5
PV
FV
Today

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT

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 A B
Present 1. An amount of money at some future
time period. it is the principal plus total
Value interest earned over a stated period.

Future 2. A length of time (often a year, but can

be a month, week, day, hour, etc.)
Value
3. The compensation paid to a lender (or saver)
Unlocking Period for the use of funds expressed as a percentage for
a period (normally expressed as an annual rate).
Terminologies
Interest 4. An amount of money today, or the
current value of a future cash flow.
Rate
Present 4. An amount of money today, or the
Value current value of a future cash flow.
Future 1. An amount of money at some future time period. it
is the principal plus total interest earned over a stated
Value period.

2. A length of time (often a year, but can

Period
be a month, week, day, hour, etc.)
Interest 3. The compensation paid to a lender (or saver) for the
use of funds expressed as a percentage for a period
Rate (normally expressed as an annual rate).
Group Activity
The class will be divided into seven groups. Below is the assigned problem to
be solved by each group:
Group 1 Problem 1
Group 2 Problem 2
Group 3 Problem 3
Group 4 Problem 4
Group 5 Problem 5
Group 6 Problem 6
Group 7 Problem 7
Simple Interest
- the charging interest rate R based on a principal P over T number of years.

Interest = P x R x T
EXAMPLE:
Principal = PHP500,000
Rate = 8%
Time = 5 years

Thus, Interest = 500,000 x .08 x 5 = PHP200,000

Compound Interest
- the interest in the first compounding period is added on the principal,
which will then be the basis for the interest to be computed for the next
period.

So in our earlier example, the interest to be earned on the first year is equal to
500,000 x .08 = 40,000.
The 40,000 interest will be added to the 500,000 principal which will then be
the basis for interest computation for the second year; 540,000 x .08 = 43,200,
and so on.
 𝑟 𝑇𝑥𝑚
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑃𝑥 1 + −𝑃
𝑚
Where:
P = Principal
r = rate
T = time
m = compounding frequency
Compounding Frequency
- the number of times interest is computed on a certain principal in one
year.
If the investment pays annually, the interest is the same as computed above
since m=1.

Compute for the total interest if the investment pays

semi-annually.
5𝑥2
Interest = 500,000 x (1+(0.08/2)) – 500,000 = PHP240,122.14
Compute the interest earned over the 5 year term with
PHP500,000 as principal, 8% interest using the following
compounding periods.
Quarterly PHP242,973.70

Monthly PHP244,922.85

Semi-monthly PHP245,416.34

Daily (365 days) PHP245,879.66

Effective Annual Rate (EAR)
The formula for computing EAR is as follows:
𝑟 𝑚
𝐸𝐴𝑅 = 1+ −1
𝑚
This is very similar to the formula for
computing for interest earned using
compounded interest. The only difference is
that EAR only takes into consideration the
actual interest for one year.
Illustration 1
Mr. Lopez wishes to find the effective annual rate for
his loan in BOD bank with a 5% nominal annual rate
when interest is compounded
(1) annually,
(2) semi-annually, and
(3) quarterly
FUTURE VALUE: SINGLE AMOUNT

The accumulated value of the principal

or present value and all interest amounts
of prior periods.
Future Value Using the Formula
𝒏
FV=PV(1+i)
Where: FV = Future value
PV = Present value
i = Periodic interest rate
n = total number of compounding period
Problem 4

Jenny has invested ₱ 10, 000 on January 1, 2018

at 10% interest compounded annually for five
years.
Required: Compute the future value at the end
of five years.
FUTURE VALUE: SINGLE AMOUNT
Given: Solution:
𝒏
PV = ₱ 10, 000 FV=PV(1+i)
i = 0.10 / 1 𝟓
FV= ₱10, 000 (1 + 0.10)
n =5x1 FV= ₱10, 000 (1.610510)
FV= ₱16, 105.10
 FUTURE VALUE: ANNUITY

Annuity

It refers to a series of consecutive equal

investments or payments made at an equal
interval of time.
Future Value of Annuity Using the Formula
𝑛
(1 + 𝑖) −1
𝐹𝑉 = 𝐴
𝑖
Where: FV = Future value of annuity
A = Annuity investment
i = Periodic interest rate
n = Total compounding periods
Problem 5

Angel invested ₱ 5, 000 every end of the year at

10% interest compounded annually for four
years.

Required: Compute the future value of annuity.

 FUTURE VALUE: ANNUITY
Given: Solution:
(1+𝑖)𝑛 −1
A = ₱ 5, 000 𝐹𝑉 = 𝐴 𝑖
i = 0.10 / 1 (1+0.10)4 −1
𝐹𝑉 = ₱ 5, 000 0.10
n =4x1 𝐹𝑉 =
(1.10)4 −1
₱ 5, 000 0.10
𝐹𝑉 = ₱ 5, 000 (4.641)
𝐹𝑉 = ₱ 23, 205
 PRESENT VALUE: SINGLE AMOUNT

Present Value

It refers to the value of the money at present.

Present Value Using the Formula
−𝑛
𝑃𝑉 = 𝐹𝑉 (1 + 𝑖)
Where: PV = Present value
FV = Future value
i = Periodic interest rate
n = Total number of compounding periods
Problem 6
Princess’s goal is to have an investment of ₱
500, 000 after four years. The amount to be
invested will earn an interest of 12%
compounded quarterly.
Required: Determine the amount to be invested
by Princess at 12% interest compounded
quarterly.
 PRESENT VALUE: SINGLE
AMOUNT
Given: Solution:
−𝒏
FV = ₱ 500, 000 PV=FV(1+i)
−𝟏𝟔
FV= ₱500, 000 (1 + 0.03)
i = 0.12 / 4
FV= ₱500, 000 (1.03)−𝟏𝟔
n =4x4
FV= ₱500, 000 (0.623166939)
FV= ₱ 311, 583.35
 PRESENT VALUE: ANNUITY

Present value of annuity

It refers to the present value of all individual

investments or deposit made.
Present Value of Annuity Using the Formula
1 − (1 + 𝑖)−𝑛
𝑃𝑉 = 𝐴
𝑖

Where: PV = Present value

A = Annuity
i = Periodic interest rate
n = Total number of compounding periods
Problem 7

Izzy plans to invest ₱ 3, 000 at the end of every

quarter for 8 years at the interest rate 10 %
compounding quarterly.

Required: Determine the present value of the

quarterly annuity of ₱ 3, 000 for eight years.
 PRESENT VALUE: SINGLE
AMOUNT
Given: Solution:
1−(1+𝑖)−𝑛
𝑃𝑉 = 𝐴
A = ₱ 3, 000 𝑖
1−(1+0.025)−32
𝑃𝑉 = ₱ 3, 000
i = 0.10 / 4 0.025
1−(1.025)−32
𝑃𝑉 = ₱ 3, 000
n =8x4 0.025
𝑃𝑉 = ₱ 3, 000 (21.84917796)
𝑃𝑉 = ₱ 65, 547.53
Quiz Booklet
1. On January 1, 2018, Mark has invested ₱ 20, 000 at 8% interest
compounded semi-annually for four years.

Required: Compute the future value at the end of five years.

Formula:
𝑟 𝑚𝑇
𝐹𝑉𝑇 = 𝑃𝑉 1 +
𝑚
Quiz Booklet
2. Ms. Sarah’s goal is to have an investment of ₱ 600, 000 after three
years. The amount to be invested will earn an interest of 10%
compounded quarterly.
Required: Determine the amount to be invested by Ms. Sarah at 10%
interest compounded quarterly.

Formula:
𝑃𝑉 = 𝐹𝑉 (1 + 𝑖)−𝑛