TIME VALUE OF MONEYBy: TASNIM C. BALINDONG

SUMMARY OUTLINE: Definition of Time Value of Money Why time is important ? Present Value and Future Value Formulas Sample Calculation Calculation using Tables Benefits of the Knowledge of Time

Value of Money Sample Problems

introductionTime Value of Money (TVM) is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities.

SIMPLY PUT THIS CONCEPT IN THE TIME VALUE OF MONEY:

Which would you rather have -- $1,000 today or $1,000 in 5 years?

Money received sooner rather than later allows one to use the funds for investment or consumption purposes.

All other factors being equal, it is better to have $1,000 today.

Why is TIME such an important element in your decision?

TIME allows one the opportunity to postpone consumption and earn

INTEREST.

BASIC CONCEPTS OF TVM:

Present Value (PV)- the value now of a sum of money expected to be received in the future. Computing the present value of a sum

isknown as discounting.

Future Value (FV)Future Value is the amount of money that an investment made today (the present value) will grow to by some future date.

Computing the future value of a sum is known as compounding.

PRESENT VALUE FORMULA:

FUTURE VALUE FORMULA

Future Value Sample Calculation:

Let’s calculate the future value of 10,000 received when the interest rate is 10%?.

Future Value Calculation:

Example 2:  You can afford to put $10,000 in a savings account today that pays 6% interest compounded annually.   How much will you have 5 years from now if you make no withdrawals?

PV = 10,000i = .06n = 5

FV = 10,000 (1 + .06)5

=  10,000 (1.3382255776) = 13,382.26

Present Value Calculation

using the equation:

the present value of 10,000 received in 3 years when the interest rate is 10% ?= 7513.1

Example 1:The present value of 10,000 received in 3 years when the interest rate is 10%?

PV =? FV = 10,000 r = 10% or .10 n = 3

PV =? FV = 10,000 PV = (10,000)/((1+.10)3) =(10,000)/((1.1)3) =(10,000)/(1.331) = 7513.1

TIME VALUE OF MONEY

Time Value Calculations using Tables:

Benefits of the knowledge of the time value of money:

For investment analysis To decide the financial benefits of

projects To compare investment alternatives To analyze how time impacts business

activities such as loans, mortgages, leases, savings, and annuities.

THANK YOU!!!

Example 2: Another financial institution offers to pay 6% compounded semiannually.  How much will your $10,000 grow to in five years at this rate?

Interest is compounded twice per year so you must divide the annual interest rate by two to obtain a rate per period of 3%.  Since there are two compounding periods per year, you must  multiply the number of years by two to obtain the total number of periods.

PV = 10,000i = .06 / 2 = .03n = 5 * 2 = 10

FV = 10,000 (1 + .03)10

= 10,000 (1.03) 10

=  10,000 (1.343916379) =  13,439.16

Solve it on your own!

Present Value of 25,000 received in five years when the interest rate is 5%?