TIME VALUE OF

MONEY
FINANCIAL MANAGEMENT

Engr. Irish
Villalobos
 TIME VALUE OF MONEY
Key Topics:
• Concept and Principle of Time Value of Money
• Future Value and Present Value
• Discounting and Compounding
• Perpetuity
 TIME VALUE OF MONEY
• Is the CONCEPT that money available at the present
time is worth more than the identical sum 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. TVM is also
sometimes referred to as present discounted value.
 TIME VALUE OF MONEY
FUTURE VALUE

• refers to a method of calculating how much the 

present value (PV) of an asset or cash will be worth at a
specific time in the future.
 TIME VALUE OF MONEY
FUTURE VALUE Calculation

• Simple Interest

• Compound Interest
 TIME VALUE OF MONEY
FUTURE VALUE

Where:

FV = Future Value
PV = Present Value or Principal Value.
i = rate of interest for that period.
r = per annum interest rate.
t = time in year
 TIME VALUE OF MONEY
FUTURE VALUE

Example for Simple Interest:

 Bob invests ₱1,000.00 for five years with an interest rate

of 10%.

FV =1,000 x [1 + (0.1 x 5)]

FV =1,000 x 1.5
FV =1,500
 TIME VALUE OF MONEY
FUTURE VALUE

Example for Compound Interest:

John invests 1,000 for five years with an interest rate of

10%, compounded annually. 

FV =1,000 x [(1 + 0.1)5]

FV =1,000 x 1.61051
FV =1,610.51
 TIME VALUE OF MONEY
PRESENT VALUE

• Is a formula used in Finance that calculates the present

day value of an amount that is received at a future date.
 TIME VALUE OF MONEY
PRESENT VALUE Calculation

Simple Interest :
 TIME VALUE OF MONEY
PRESENT VALUE

Where:

FV = Future Value
PV = Present Value or Principal Value.
i = rate of interest for that period.
r = per annum interest rate.
t = time in year
 TIME VALUE OF MONEY
PRESENT VALUE

Example:

Suppose you are depositing an amount today in an account that

earns 5% interest, compounded annually. If your goal is to have ₱
5,000.00 in the account at the end of six years, how much must you
deposit in the account today?

PV = $5,000 / (1 + 0.05)6
PV = $5,000 / (1.3401)
PV = $3,731
 TIME VALUE OF MONEY
DISCOUNTING AND COMPOUNDING

Two methods used for ascertaining the worth of money.

• Discounting

• Compounding
TIME VALUE OF MONEY
 TIME VALUE OF MONEY
Perpetuities

• are used to find the present value of a company’s future

projected cash flow stream and the company’s 
terminal value.

• A perpetuity is a type of annuity that receives an infinite

amount of periodic payments.
 TIME VALUE OF MONEY
PERPETUITY

Formulas :

or
 TIME VALUE OF MONEY
PERPETUITY

Where:

PV = Present Value.
r = Discount Rate.
D = Dividend or Coupon per period.
 TIME VALUE OF MONEY
PERPETUITY

Example:

Alex offered a bond that pays coupon payments of ₱10 per

year and continues for an infinite amount of time. Assuming
a 5% discount rate

PV of Perpetuity = 10/0.05
PV of Perpetuity = ₱200.00
 TIME VALUE OF MONEY

Application Exercise
A man wants to invest a sum of P50,000 in two
investments. The first investment earns a rate of
interest 4 times that of the second investment. In 3
years the first investment grows to P37,200. For 10
years, the second investment grows to P24,000.
 TIME VALUE OF MONEY
1. Find the sum invested in each rate of interest.
A.   P35,000 and P15,000
B.   P35,500 and P14,500
C.   P30,000 and P20,000
D.   P32,000 and P18,000
 
2. Find the rate of interest of each.
A.   8% and 2%
B.   6% and 4%
C.   7% and 3%
D.   5% and 1%
 TIME VALUE OF MONEY
Solution:
First Investment Second
Investment
F= 37,200
F= 24,000
P= x
P= y
Rate = 4i
Rate = i
T = 3 years
T = 10 years
 TIME VALUE OF MONEY
Solution:
First Investment Second Investment
37,200 = x (1+ (4i)(3)) 24,000 = x (1+ (i)(10))
37,200 = x (1+ 12i) 24,000 = x (1+ 10i)
X= (37,200/(1+12i)) X= (24,000/(1+10i))
eq.1 eq. 2
 TIME VALUE OF MONEY
Eq. 3
x + y = 50,000

Substitute eq.1 and eq. 2 to eq. 3

(37,200/(1+12i))+(24,000/(1+10i)) = 50,000
Shift solve; x1= 0.02 and x2= -0.09333
 TIME VALUE OF MONEY
Substitute x1= 0.02 to eq. 1 and eq.
2

Rate of Interest
X= (37,200/(1+12i)) each

X= (37,200/(1+12(0.02))) Rx = 2%
Ry = 8%
X= 30,000

Y = (24,000/(1+10i))
Y = (24,000/(1+10(0.02)))
Y = 20,000
 TIME VALUE OF MONEY
1. Find the sum invested in each rate of interest.
A.   P35,000 and P15,000
B.   P35,500 and P14,500
C.   P30,000 and P20,000
D.   P32,000 and P18,000
 
2. Find the rate of interest of each.
A.   8% and 2%
B.   6% and 4%
C.   7% and 3%
D.   5% and 1%
THANK YOU 