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Money - Time Relationships and Equivalence Pt1

This document discusses various time value of money concepts: - Simple and compound interest are explained, with examples showing how to calculate future values. - Cash flow diagrams are introduced as a way to visually represent the timing and magnitude of cash inflows and outflows over time. - Interest tables are described as tools to look up factors for calculating future or present values under different interest rates and time periods.

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Fredmelson Apolo Gaspar
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27 views

Money - Time Relationships and Equivalence Pt1

This document discusses various time value of money concepts: - Simple and compound interest are explained, with examples showing how to calculate future values. - Cash flow diagrams are introduced as a way to visually represent the timing and magnitude of cash inflows and outflows over time. - Interest tables are described as tools to look up factors for calculating future or present values under different interest rates and time periods.

Uploaded by

Fredmelson Apolo Gaspar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Money- time Relationships and equivalence

• Simple Interest
• Compound Interest
• Cash Flow Diagrams
• Interest Tables
• Single Payment Factors
• Uniform Series Factors
• Use of Multiple Factors
• Uniform Gradient Factors
• Geometric Series
• Nominal and Effective Interest Rates
• Continuous Compounding and Discrete Cash Flows
• Difference in Payment Period (PP) and Compounding Period (CP)
Money- time Relationships and equivalence
INTRODUCTION:
CAPITAL - wealth in the form of money or
property that can be used to produce more wealth

INTEREST - increase between an original sum of


money borrowed and the final amount owed

INTEREST RATE - percentage of the original amount per


time unit
Money- time Relationships and equivalence
SIMPLE INTEREST:
the total interest earned or charged is linearly proportional to the initial
amount of the loan, the interest rate and the number of interest
periods.
Money- time Relationships and equivalence
SIMPLE INTEREST SAMPLE
$2,000 is deposited in a savings account that pays 10% simple
interest. How much will the account be worth in 5 years?
Money- time Relationships and equivalence

Worth of account in 5 years = P + I

P + I = P + Pni = P(1+Ni)
P + I = 2000(1+(5*0.10))
P + I = 3000 USD
Money- time Relationships and equivalence
SIMPLE INTEREST SAMPLE
$5,000 is deposited quarterly in a checking account that pays 5%
simple interest. How much will the account be worth in 10 years?
Money- time Relationships and equivalence
$2,000 is deposited in a savings account that pays 10% simple
interest. How much will the account be worth in 5 years?
Money- time Relationships and equivalence
COMPOUND INTEREST:
interest accrued is calculated on the principal plus the total amount of
interest accumulated in the previous periods

interest accrued is calculated on the principal plus the total amount of interestaccumulated in the previous
periods
Money- time Relationships and equivalence
COMPOUND INTEREST SAMPLE
If $2,000 is placed in an account that earns 10% compounded annually,
what will its worth be in 5 years?
Money- time Relationships and equivalence
If $2,000 is placed in an account that earns 10%
compoundedannually, what will its worth be in 5 years?
Money- time Relationships and equivalence
An investment earns 3% compounded monthly. Find the value of an
initial investment of $5,000 after 6 years.
Money- time Relationships and equivalence
Solution:
Determine what values are given and what values you need to find.

Earns 3% compounded monthly: the rate is i=0.03 and the number of times compounded each year is m=12
Initial investment of $5,000: the initial amount is the principal, P=5000
6 years: N=6

You are trying to find Ic, the future value (the value after 6 years). Now apply the formula with the known
values:
𝑚𝑁
𝑖
𝐼𝑐 = 𝑃 1 +
𝑚
12∗6
0.03
= 5000 1 +
12
= 5984.74
Answer: The value after 6 years will be $5,984.74.
Money- time Relationships and equivalence
Simple Interest vs. Compound Interest
Money- time Relationships and equivalence
Cash Flow Diagram:
Cash flow is the sum of money recorded as receipts or disbursements
in a project’s financial records.
A cash flow diagram presents the flow of cash as arrows on a time line
scaled to the magnitude of the cash flow, where expenses are down
arrows and receipts are up arrows. Year-end convention ~ expenses
occurring during
A mechanical thecostyear
device will are assumed to occur at the end of the year.
$20,000
when purchased. Maintenance will
cost $1000 per year. The device will
generate revenues of $5000 per year
for 5 years. The salvage value is
$7000.
Money- time Relationships and equivalence
CASH FLOW DIAGRAMS
Money- time Relationships and equivalence
SAMPLE PROBLEM: (Please try to make cash flow diagram)

1. Suppose you borrowed 1,000 usd on May 1, 2000, and agree to


repay the loan in one lump sum of 1,402.60 usd at the end of four
years at 7%
2. If you borrow $2000 now and must repay the loan plus interest (at
rate of 6% per year) after five years. Draw the cash flow diagram.
What is the total amount you must pay?
Money- time Relationships and equivalence
• Interest Tables
• Single Payment Factors
• Uniform Series Factors
Money- time Relationships and equivalence
• SIMPLE INTEREST TABLE
• The simple interest table is used to find the total interest expense on an
investment or debt that is to be completed in some future period, without
factoring in the impact of any compounding of interest.

• For example, to determine the total amount of an investment of $50,000 at


the end of seven years, using an interest rate of 9%, go to the simple interest
table. Next, move down to the row that contains interest rate factors for
seven years, and move across to find the cell for the 9% interest rate, which
contains a factor of 1.63. Then, multiply this by $50,000 to arrive at $81,500.
Money- time Relationships and equivalence
Money- time Relationships and equivalence
• COMPOUND INTEREST (FUTURE AMOUNT OF 1 AT COMPOUND
INTEREST DUE IN N PERIODS)
• The table is used to find the total interest expense on an investment or debt
that is to be completed in some future period, including the impact of any
compounding of interest.
• For example, to determine the total amount of an investment of $50,000 at
the end of 11 years, using an interest rate of 8%, go to the compound interest
table for future amounts, move down to the row that contains interest rate
factors for 11 years, and move across to find the cell for an 8% interest rate,
which contains a factor of 2.3316. Then, multiply this by $50,000 to arrive at
$116,580.
Money- time Relationships and equivalence
Money- time Relationships and equivalence
• COMPOUND INTEREST (PRESENT VALUE OF 1 DUE IN N PERIODS)
• The table is used to determine the discounted current value of an investment
that will be payable in a fixed amount at some point in the future.

• For example, to determine the discounted current value of a payment of


$50,000 that will occur in 17 years, assuming a compounded rate of
investment in the interim of 7%, go to the compound interest table for the
present value of money due in future periods. Move down to the row that
contains discounting factors for 17 years, and move across to find the cell for
a 7% interest rate, which contains a factor of 0.3166. Then, multiply this by
$50,000 to arrive at $15,830.
Money- time Relationships and equivalence

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