Time Value Of Money

Time Line

Years 0 1 2 3 4
5%

Cash PV = $ 100 FV = ?

Future Value

The process of going forward, from present values (PVs) to future values (FVs), is called
compounding.

FVn = PV (1 + i)n

𝐹𝑉𝑛
PV = ( 1+𝑖 )𝑛

Where FVn = Future Value

n = Number of Years

i = Interest Rate

pv = Present Value

Future Value Periodically

𝐹𝑉𝑛
PV = 𝑖 𝑛𝑚
(1+𝑚 )

𝑖
FVn = PV (1 + 𝑚)nm

Where;

m = number of period interest paid in annually

semi annual = 2 times

quarterly = 4 times

𝑛 𝐹𝑉𝑛
i = √ −1
𝑃𝑉
ANNUITIES

Ordinary Annuity

Period 0 1 2 3

Payment -$ 100 -$ 100 -$100

$ 100

$ 105

$ 110.25

$ 315.25

FV=PV(1 + i)n

(1+𝑖)𝑛 − 1
Future Value Annuity Ordinary 1. FVAn = PMT { }
𝑖

Annuity Due

Period 0 1 2 3

Payment -$ 100 -$ 100 -$100

$ 105

$ 110.25

$ 115.76

$ 331.01

FV=PV(1 + i)n

(1+𝑖)𝑛 − 1
Future Value Annuity DUE FVAn = PMT { } (1 + i )
𝑖
Ordinary Annuity

Period 0 1 2 3

Payment -$ 100 -$ 100 -$100

$ 92.24

$ 90.70

$ 86.38

$ 272.32
𝐹𝑉𝑛
PV = (1+𝑖)𝑛

1
1−(1+𝑖)𝑛
Present Value Annuity PVAn = PMT ( )
𝑖

Annuity Due

Period 0 1 2 3

Payment -$ 100 -$ 100 -$100

$ 100

$ 90.24

$ 90.70
𝐹𝑉𝑛
$ 285.94 PV = (1+𝑖)𝑛

1
1−(1+𝑖)𝑛
Present Value Annuity Due PVAn(Due) = PMT ( ) (1 + i )
𝑖

𝑖𝑁𝑜𝑚 𝑚
EAR (or EFF %) = (1 + ) − 1.0 Effective (or equivalent) annual rate (EAR)
𝑚