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TIME VALUE OF MONEY REVIEWER

The Time Value of Money (TVM) concept explains that money today is worth more than the same amount in the future due to its potential earning capacity. Key formulas include Simple Interest (SI = P × r × t), Compound Interest (FV = P × (1 + r)^t), and Present Value (PV = FV / (1 + r)^t), each demonstrating different ways to calculate interest and future value. The document emphasizes the advantages of compound interest over simple interest and the importance of understanding present value for investment decisions.

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2 views

TIME VALUE OF MONEY REVIEWER

The Time Value of Money (TVM) concept explains that money today is worth more than the same amount in the future due to its potential earning capacity. Key formulas include Simple Interest (SI = P × r × t), Compound Interest (FV = P × (1 + r)^t), and Present Value (PV = FV / (1 + r)^t), each demonstrating different ways to calculate interest and future value. The document emphasizes the advantages of compound interest over simple interest and the importance of understanding present value for investment decisions.

Uploaded by

jasmine.angela1119
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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📖 TIME VALUE OF MONEY REVIEWER

📌 What is the Time Value of Money (TVM)?


💡 Money today is worth more than the same amount in the future because it can be
invested to earn interest over time.

1️⃣ Simple Interest (SI)


💡 Definition: Simple Interest is the interest earned only on the principal (original amount)
over a period of time.

📌 Formula:
SI=P×r×t

Where:

SI = Simple Interest
P = Principal (Initial amount of money)
r = Interest rate per period (as a decimal)
t = Time (in years)

📝 Example 1 (Simple Interest Calculation)


You deposit ₱5,000 in a bank at 4% simple interest for 3 years. How much interest will you
earn?

🔹 Solution:
SI = P × r × t

SI = 5,000 × 0.04 × 3

SI = 600

✅ Final Answer: You earn ₱600 in interest.


📌 Future Value (FV) with Simple Interest
💡 Formula:
FV=P+SI

Where:

FV = Future Value (total money after interest)


P = Principal
SI = Simple Interest earned

🔹 Example 2 (Future Value Calculation)


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FV = 5,000 + 600

FV = 5,600

✅ Final Answer: You will have ₱5,600 after 3 years.


2️⃣ Compound Interest (CI)
💡 Definition: Compound Interest is interest earned on both the principal and the
accumulated interest over time.

📌 Formula:
FV=P×(1+r)^t

Where:

FV = Future Value
P = Principal
r = Interest rate per period (as a decimal)
t = Time (in years)

📝 Example 3 (Compound Interest Calculation)


You invest ₱10,000 in a bank with 5% interest compounded annually for 3 years. How much
will you have after 3 years?

🔹 Solution:
FV = P × (1 + r)^t

FV = 10,000 × (1.05)^3

FV = 10,000 × 1.157625

FV = 11,576.25

✅ Final Answer: ₱11,576.25 after 3 years.


3️⃣ Present Value (PV)
💡 Definition: Present Value is how much you need to invest today to reach a certain amount
in the future.

📌 Formula:
PV=FV / (1+r)^t

Where:

PV = Present Value (amount you need to invest today)


FV = Future Value (amount you want in the future)
r = Interest rate per period (as a decimal)
t = Time (in years)

📝 Example 4 (Present Value Calculation)


You want ₱50,000 in 5 years, and the bank offers 6% interest. How much should you deposit
today?

🔹 Solution:
PV = FV ÷ (1 + r)^t

PV = 50,000 ÷ (1.06)^5

PV = 50,000 ÷ 1.338225

PV = 37,365.04

✅ Final Answer: You need to deposit ₱37,365.04 today.


4️⃣ Monthly Compound Interest
💡 Definition: If interest is compounded multiple times a year (monthly, quarterly, etc.), we
adjust the formula.

📌 Formula:
FV = P × (1 + r/n)^(n×t)

Where:

FV = Future Value
P = Principal
r = Annual interest rate (as a decimal)
n = Number of times compounded per year
t = Time (in years)

📝 Example 5 (Compounded Monthly Calculation)


₱8,000 is invested at 6% compounded monthly for 2 years. How much will you have after 2
years?

🔹 Solution:
FV = P × (1 + r/n)^(n×t)

FV = 8,000 × (1 + 0.06/12)^(12×2)

FV = 8,000 × (1.005)^24

FV = 8,000 × 1.12749

FV = 9,019.92

✅ Final Answer: ₱9,019.92 after 2 years.


5️⃣ Finding Interest Rate
💡 Definition: If you know how much an investment grows, you can find the annual interest
rate.

📌 Formula:
r = (FV ÷ P)^(1/t) - 1

📝 Example 6 (Finding Interest Rate)


An investment of ₱20,000 grows to ₱26,000 in 4 years. What is the annual interest rate?

🔹 Solution:
r = (FV ÷ P)^(1/t) - 1

r = (26,000 ÷ 20,000)^(1/4) - 1

r = (1.3)^(1/4) - 1

r = 1.0674 - 1

r = 0.0674 or 6.74%

✅ Final Answer: 6.74% annual interest rate.


📌 Quick Summary
Concept Formula Key Meaning

Simple SI = P × r × t Interest only


Interest on the
principal

Future Value FV = P + SI Total money


(SI) after simple
interest

Compound FV = P × (1 + Interest on
Interest r)^t principal +
past interest

Present PV = FV ÷ (1 + How much to


Value r)^t invest today
for a future
goal

Compoundin FV = P × (1 + Interest
g Monthly r/n)^(n×t) added
multiple
times a year

Finding r = (FV ÷ Calculate


Interest Rate P)^(1/t) - 1 interest rate
when FV & P
are known

📌 Final Key Takeaways


✔ Simple Interest is easy but grows slowly.
✔ Compound Interest grows faster because it earns on past interest.
✔ Present Value helps you know how much to invest today.
✔ Monthly Compounding gives more earnings than annual compounding.
✔ Finding the Interest Rate helps measure investment growth.

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