QUIBLAT, Shiela

SANTOS, Franko Ray

SUELLO, Jessa
YAMADA, Naoichi
the idea that
money today in the present is
worth more than the same
amount in the
future
due to its earning potential
capacity
allows one the opportunity to
postpone consumption and
earn interest
• Risk and uncertainty
• Inflation
• Consumer consumption
• Investment opportunities
Lump sum
Annuities
Perpetuities
Uneven cash streams
Involves a
single cash flow
that occurs in a
single point
in time.
Compounding
The process of determining the
future value of an investment
Discounting
The process of determining the
present value of an investment
 Present value – the cash today
• Amount needed today to reach a future value
𝑭𝑽
PV= 𝑵
𝟏+𝒊
PV = present value i = interest rate
FV = future value N = total periods
 Future value – the cash later
• Amount to be received in the future

𝑵
𝑭𝑽 = 𝑷𝑽 𝟏 + 𝒊
FV = present value i = interest rate
PV = future value N = total periods
You deposit ₱2,000 today at 6% interest.
How much will you have in 5 years?

Solution:

FV = PV 1 + i N
5
FV = ₱2,000 1 + 0.06
FV = ₱2,676.45
How much must be deposited in a bank
account that pays 5% interest per year in
order to be worth ₱1,000 in three years?
Solution:
𝐹𝑉
PV=
1+𝑖 𝑁
₱1,000
PV=
1+0.05 3
PV= ₱863.84
An annuity
is a series of
equal payments
made at
fixed intervals for a
specified number of periods
ORDINARY ANNUITY
Equal payments occurring at the
end of every period
ANNUITY DUE
Equal payments made at the
beginning of every period

START END
Equal payments occurring at the end of each period
Interest = 5%

0 1 2 3
₱10,000 ₱10,000 ₱10,000
0
10,000 x (1.05)
₱10,500
1
10,000 x (1.05)
₱11,025
2
10,000 x (1.05)
FUTURE VALUE ₱31,525
 Formula:

FV = PMT [ (1+i) n

i
–1
]
FV = future value
PMT = payment
i = interest rate
n = total number of periods
 From the previous problem:

[ ]
(1+0.05) 3 –1
FV = 10,000
0.05

FV = 31,525
Equal payments occurring at the end of each period
Interest = 5%

0 1 2 3
₱10,000 ₱10,000 ₱10,000
₱9,523.81
10,000 x (1.05)-1
₱9,070.29
10,000 x (1.05)-2
₱8,638.38
10,000 x (1.05)-3 PRESENT VALUE ₱27,232.48
 Formula:

PV =PMT [ 1– (1+i)
i
-n
]
PV = present value
PMT = payment
i = interest rate
n = total number of periods
 From the previous problem:

PV = 10,000 [ 1– (1+0.05)
0.05
-3
]
FV = 27,232.48
Equal payments made at the beginning of each period
Interest = 5%

0 1 2 3
₱10,000 ₱10,000 ₱10,000
₱10,500.00
1
10,000 x (1.05)

₱11,025.00
2
10,000 x (1.05)

₱11,576.25
3
10,000 x (1.05)
FUTURE VALUE ₱33,101.25
 Formula:

[ ]
(n+1)
(1+i) –1
FV = PMT – PMT
i
PV = present value
PMT = payment
i = interest rate
n = total number of periods
 From the previous problem:

[ ]
(3+1)
(1+0.05) –1
FV = 10,000 – 10,000
0.05

FV = 33,101.25
Equal payments made at the beginning of each period
Interest = 5%

0 1 2 3
₱10,000 ₱10,000 ₱10,000
10,000 x (1.05)0
₱9,523.81
10,000 x (1.05)-1

₱9,070.29
10,000 x (1.05)-2
₱28,594.10 PRESENT VALUE
 Formula:

PV = PMT + PMT [ 1 – (1+i)-(n-1)

i ]
PV = present value
PMT = payment
i = interest rate
n = total number of periods
 From the previous problem:

PV =
[
10,000 + 10,000
1 – (1+0.05)-(3-1)
0.05 ]
PV = 28,594.10
 PRESENT FUTURE
Ordinary
Annuity 27,232.48 31,525.00
Annuity
Due 28,594.10 33,101.25
A stream of
equal payments at
fixed intervals
expected to continue
forever.
𝑃𝑀𝑇
𝑷𝑽 =
𝑖
Suppose each consol promised to pay ₱1,000
per year in perpetuity. What would each
bond be worth if the opportunity cost rate,
or discount rate was 5%?

𝑃𝑀𝑇 ₱1,000
PV = =
𝑖 0.05
= ₱20,000
With the previous problem:
Suppose the interest rate rose to 10%, what
would happen to consol’s value?

𝑃𝑀𝑇 ₱1,000
PV = =
𝑖 0.10
= ₱10,000
A series of
cash flows in which
the amount
varies
from one period to the next.
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑛
𝑃𝑉 = 1
+= 2
+ …+
(1 + 𝑖) (1 + 𝑖) (1 + 𝑖)𝑛
𝑛
𝐶𝐹𝑡
=෍
(1 + 𝑖)𝑡
𝑡=1
 UNEVEN CASH FLOWS
PRESENT VALUE
0 1 2 3 4 5 6 7
i = 6%

100 200 200 200 200 0 1,000

94.34
178.00
167.92
158.42
149.45
0
665.06
1,413.19
Every cash stream will use the
present value, and the sum of all
present values will be added to get its TOTAL.
UNEVEN CASH FLOWS
FUTURE VALUE
0 1 2 3 4 5 6 7

i = 6% 100 200 200 200 200 0 1,000

0
224.72
238.20
252.50
267.65
141.85
2,124.92

Every cash stream will use the

future value, and the sum of all
future value will be added to get its TOTAL.
Useful in
investment decisions
Beneficial in
capital budgeting
decisions.