Financial Management

1. Time Value of Money
“ I dream of a world where we are all financially literate,
financially free and we all investors”
Davie Sikhosana

2. What is MONEY?

3. What is MONEY?
Something generally accepted as a medium of exchange, a
measure of value, or a means of payment.
https://www.merriam-webster.com/dictionary/money
Something generally accepted as a medium of exchange, a
measure of value, or a means of payment.
https://www.cliffsnotes.com/study-guides/economics/money-and-banking/definition-of-
money

4. Why Value MONEY?

5. Time Vs. Money

6. Time Value of Money
• The time Value of money (TVM) is the idea that
money available at the present time is worth
more than the same amount 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
• Time 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, leases, savings

7. Reason for Time Value of Money

8. Reason for Time Value of Money

9. Importance of Time value of Money

10. PRESENT VALUE

11. PRESENT VALUE
Present value (PV) is the current value of a
future sum of money or stream of cash flow
given a specified rate of return.
Present value( PV) is the concept that states an
amount of money today is worth more than that
same amount in the future. In other words, money
received in the future is not worth as much as an
equal amount received today.

12. PRESENT VALUE
TVM help us in knowing the value of money invested. As time changes value of money
invested on any project/ firm also changes. And its present value is calculated by
using “mathematical formula” which tell us the value of money with respect of time
In case of multiple compounding per year
(denoted by n), the formula for PV can be
expanded as,

13. PRESENT VALUE ; Example # 1
Let us take simple example of 2,000 future cash flow (FV)to be received after 3
years. According to the current trend, the applicable discount rate is 4%. Calculate
the future cash flow today (PV)

15. PRESENT VALUE ; Example # 2
David who seeks to certain amount of monet today such that after 4 years he can
withdraw 3,000. The applicable discount rate is 5 % to be compounded half yearly.
Calculate that David is required deposit today.

17. PRESENT VALUE
The Concept of Present value primarily based on
the time of money which states that a value of
money today is worth than a value of money in the
future. However, there is a limitation of present
value calculation as it assumes that the same rate
of return would be earned over the entire period
of time- no rate of return guaranteed for any
investment as various market factors can impact
the rate of return negatively resulting in erosion
of the present value. As such, the assumption of
an appropriate discount rate is all more important
for correct valuation of the future cash flow.

18. FUTURE VALUE

19. PRESENT VALUE VS. FUTURE VALUE
(Assuming you want to buy a car)
PRESENT
(borrowing)
PV FV
P1 MILLION P0.00
FUTURE
(saving instead of borrowing)
PV
FV
P0.00
P1 MILLION
NOTE : IT IS ALWAYS DEPEND ON THE SITUATION.

20. THEREFORE :
The Difference between the two values depends on the two factors :
INTEREST RATE
TIME
The greater the rate,
the larger the
interest, and as a
result of future value.
The longer the money is left
in the account, the more
interest gains.
● SIMPLE INTEREST
● COMPOUNDING INTEREST

21. FORMULAS : FOR SIMPLE INTEREST

22. ILLUSTRATION : FOR SIMPLE INTEREST
1. If you deposit P6,200.00 at 6%, What is the future value
of deposit at the end of 2.5 years?
F=PV(1+rt)
F=P6,200 (1+0.06)(2.5)
F= P7,130.00

23. ILLUSTRATION : FOR SIMPLE INTEREST
2. Donna deposited P3,000.00 with an interest rate of 5%.
What is the future value after 10 years?

24. FORMULAS OF FUTURE VALUE : COMPOUND
INTEREST

25. ILLUSTRATION : COMPOUND INTEREST
1. At the beginning of the year, P2,000.00 was invested at a deposit account earning
8%, compounded annually for 2 years. How much will the investment be after 2
years?
FV = P2,000.00 (1+0.08)2 or
FV = P2,000.00 (1.1664) 0 1 year 2 year
FV = P2,332.80 P2,000.00 P2,000.00 P2,160.00
x 0.08 x 0.08
= P160.00 = P172.80
+ P2,000.00 + P2,160.00
= P2160.00
= P2332.80

26. ILLUSTRATION : COMPOUND INTEREST
2. At the beginning of the year, Juan Dela Cruz invested P100,000.00 in a certificate
of deposit for 2 years at 12% interest compounded annually. What will be the value of
the said invested at the end of 2 years?
FV = P100,000.00 (1 + 0.12)2 or
FV = P100,000.00 (1.2544) 0 1 year 2 year
FV = P125,440 P100,000.00 P100,000.00 P112,000.00
x 0.12 x 0.12
= P12,000.00 = P13,440.00
+ P100,000.00 + P112,000.00
= P112,000.00
= P125,440.00