Which would you prefer -- $10,000 today

or $10,000 in 5 years?
Obviously, $10,000 today.
You already recognize that there is TIME
VALUE TO MONEY!!
Why is TIME such an important element
in your decision?
TIME allows you the opportunity to
postpone consumption and earn
INTEREST.

The idea that money available at the present time is
worth more than the same amount 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.
Risk and Uncertainty
Inflation
Consumption
Investment opportunities
Future value
Present value
Annuities
Amortization

Future value is the value at some future time of a
present amount of money, or a series of payments,
evaluated at a given interest rate.

Where:
FV= future value
P = principal
invested
n = number of years
k = interest rate

1
0
n
n
k) ( PV FV + =
Suppose you incest's 1000 for three years in a saving account that pays 10 per cent
interest per year. If you let your interest income be reinvested, your investment will
grow as follows:

Formula:

In this equation (1 + r)
n
is called the future value interest factor (FVIF). where, FV
n
= Future value of the initial flow n year hence
PV = Initial cash flow
r = Annual rate of Interest
n = number of years
By taking into consideration, the above example, we get the same result.
FV
n
= PV (1 + r)
n
= 1,000 (1.10)
3
FV
n
= 1331
FV
n
=PV(1 +r)
n
Present Value is the current value of a future amount
of money, or a series of payments, evaluated at a
given interest rate.



1
1
) 1 (
0
n
n
n
n
k) (
FV
k
FV
PV
+
=
+
=
An Annuity represents a series of equal payments (or
receipts) occurring over a specified number of
equidistant periods

Ordinary Annuity: Payments or receipts occur at the
end of each period.

Annuity Due: Payments or receipts occur at the
beginning of each period.

A blended payment loan is repaid in equal periodic payments
However, the amount of principal and interest varies each
period
Assume that we want to calculate an amortization table
showing the amount of principal and interest paid each period
for a $5,000 loan at 10% repaid in three equal annual
instalments.

(
(
(
(

=
=
k
k) (1
1
1
PMT Principal
) PMT(PVAF Principal
n
n k,
Where:
PMT = the fixed periodic payment
T= the amortization period of the loan
r = the rate of interest on the loan