Time Value of Money

Time Value of Money

• Money available at the present time is worth

more than the same amount in the future due to

its earning potential capacity

• Demonstrates that, all things being equal, it is

better to have money now rather than later

• Would you rather receive PhP1,000,000 now or

PhP1,000,000 three years from now?

PhP1,000,000

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP1,000,000

Future Value Formula

FV = PV * (1 + i)n

Present Value Formula

PV = FV .

(1 + i)n

PhP1,000,000

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP1,000,000

Future Value Formula

FV = PV * (1 + i)n

PV = 1,000,000 .

(1 + 5%)1

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP952,381 PhP1,000,000

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP 907,029 PhP952,381 PhP1,000,000

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP863,838 PhP 907,029 PhP952,381 PhP1,000,000

PhP1,000,000

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000

Case 2 PhP1,000,000

Future Value Formula

FV = 1,000,000 * (1 + 5%)1

Present Value Formula

PV = FV .

(1 + i)n

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000 PhP1,050,000

Case 2 PhP1,000,000

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000 PhP1,050,000 PhP1,102,500

Case 2 PhP1,000,000

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000 PhP1,050,000 PhP1,102,500 PhP1,157,625

Case 2 PhP1,000,000

Comparing Values

• Rate: 5%

• Values must be compared in a specific period in

time only

• R must contain inflation

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Case 1 PhP1,000,000 PhP1,050,000 PhP1,102,500 PhP1,157,625

Case 2 PhP863,837 PhP 907,029 PhP952,381 PhP1,000,000

PV vs FV

• Future Value = Value of an asset or cash at a

specified date in the future that is equivalent in

value to a specified sum today

• Present value = Tells us how much a future sum

of money is worth today

Payment

• Payment = represents equal periodic payments

received or paid each period

• Would you rather receive PhP1,000,000 now or

PhP350,000 every year in the next three years?

• Rate: 5%

PhP350,000

Present Value

Year 0 Year 1 Year 2

Future Value

Year 3

Payment 1 PhP350,000

Payment 2 PhP350,000

Payment 3 PhP350,000

Amount

PV of PMT 1 PhP333,333.33

PV of PMT 2 317,460.32

PV of PMT 3 302,343.16

Total PhP953,136.81

PMT = (PV (1+i)n + FV) i1 – (1 + i)n

Website

www.sedpi.com

Telefax

+632-433-8795

Office Address

Unit 303, Loyola Heights Condominium

23 Dela Rosa Street, Loyola Heights

Quezon City