FINANCE MODULE 6 (2)

• Time value of money


  The concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity
• Future value of money


  The value of a current asset at a future date based on an assumed rate of growth
• Interest rate


  Represents i in the formula FV = PV(1 + i)^n
• Future value of ₱2,000 compounded at 10% annual interest for 1 year

  • ₱2,200
• Present value of ₱1,000 received in 2 years at 12% interest rate

  • ₱797.16
• Receive ₱100,000 now or ₱100,000 in 3 years

  ₱100,000 is more valuable today than in the future because if you had the money in hand today, you could invest it and earn interest on it. Another reason ₱100,000 is more valuable today is because money loses value over time, due to inflation.
• Compound amount of ₱50,000 invested at 10% interest

  • Compounded annually: ₱55,000 (1 yr), ₱80,525.5 (5 yrs)
  • Compounded semi-annually: ₱55,125 (1 yr), ₱81,444.7 (5 yrs)
  • Compounded quarterly: ₱55,191 (1 yr), ₱81,930.8 (5 yrs)
  • Compounded monthly: ₱55,236 (1 yr), ₱82,265.4 (5 yrs)
• Present value of money


  The current value of a future sum of money or stream of cash flows given a specified rate of return
• Time value of money


  A peso received today is worth more than a peso received in the future
• n in the formula FV = PV(1 + i)^n

  Represents the period/time
• Both statements are false: 1) Future value of money is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. 2) Present value is the value of a current asset at a future date based on an assumed rate of growth.
• Marife receiving ₱2,000 annually for 5 years at 5% interest

  • ₱2,552.56
• Investing ₱10,000 for 3 years at 9%

  • ₱12,950.29
• Present value of ₱15,000 received in 2 years at 12% interest compounded semi-annually

  • ₱18,937.15
• Deposit needed now at 10% compounded monthly to have ₱10,000 in 4 years

  • ₱14,893.54
• Receive ₱100,000 now or ₱110,000 in 1 year at 12% rate of return

  Prefer to receive ₱100,000 now because the FV is higher than ₱110,000 which is ₱112,000