personal finance

1. Time Value of Money
Katrina Marie M. Miranda, MBA
Instructor, Elect. 1

2. Objectives:
Identify the time value of money.
Calculate time value of money to analyze personal
financial decisions.
At the end of the lesson, students should be able to:

3. Opportunity Cost and the Time Value of Money
Have you noticed that you must
give up something when you make
choices? In every financial
decision, you sacrifice to obtain
something else that you consider
more desirable.

4. Personal Opportunity Costs
Every financial decision involves giving up
something to obtain something you consider
more desirable.
Personal resources, like financial resources,
require careful management.
Example health, abilities, knowledge.

5. Financial Opportunity Costs
Saving (or investing) today means more money tomorrow.
Spending means lost interest.
Saving and spending decisions involve considering the trade-offs.
Current needs can make spending worthwhile.
Financial choices depend on current needs, future uncertainty,
and current interest rates.

6. Financial Opportunity Costs

7. Time Value of Money
Increases in an amount of
money as a result of
interest earned.

8. Three amounts are
required to calculate the
time value
Principal (the amount of
savings).
Interest rate (annual).
The length of time the money
is on deposit (Time period).
INTEREST CALCULATIONS.
of money:

9. INTEREST CALCULATIONS.
For Example, P500 on deposit at 6 percent for six months would
earn P15.
(500 x 0.06 x 6/12, or ½ year)

11. Simple & Compound Interest
Simple Interest: r = rate n = time period
Interest continues to accrue over a period of time at a
given rate.
SI = P(r)(n)
Compounding of interest:
compensation for the investor not actually receiving
interest periodically.
A = P (1+ r)^n

12. Example: Simple Interest
P500 x 6% x 6 months/12 months
SI = P(r)(n)
= P500 x .06 x ½ year
= P15.00
In six months, a P500 deposit (principal) will earn P15.00 interest.
Therefore, you will have a total of P515 at the end of six months.

13. Example: Simple Interest
You open a savings account with P1,000 at 5% simple annual
percentage rate, how much will you earn in the first year?
SI = P(r)(n)
= P1000 x .05 x 1
= P50 interest earned in the first year

14. Example: Compound Interest
I want to invest P50,000 in a Fixed Deposit for 5 years
at 8% rate of return . How much will be the maturity
value?
A = P (1+r) ^n
= 50,000 x (1 + .08) ^ 5
= P73,466

15. Example: Compound Interest
I want to invest P10,000 in a mutual fund today. How much
will it become after 10 years, considering the rate of return of
15%?
A = P (1+r)^n
= 10,000 x (1 + .15) ^ 10
= P40,455

16. Future & Present value
Future Value:
Value that money will acquire in future, if
compounded at a given rate of return.
FV = PV (1+r)^n
Present Value:
Value of money that is expected in future, today.
PV = FV/ (1+r)^n

17. Example: Present Value
What is the present value of $1,000 received in two years if the interest
rate is?
12% per year discounted annually
PV = FV/ (1+r)^n
= 1,000 / (1+0.12) ^2
= P797.19

18. Example: Present Value
You have just won a 1 million lottery. This new lottery, however, will pay
out the award 60 years from today. What is the present value of your
award based on a 16% per annual interest rate?
PV = FV/ (1+r)^n
= 1,000,000 / (1+0.16) ^60
= P135.68

19. Example: Future Value
You are scheduled to receive P13,000 in two years. When you receive it,
you will invest it for six more years at 8 percent per year. How much will
you have in eight years?
FV = PV(1+r)^n
= 13,000 (1+0.08) ^6
= P20,629.37

20. Thank You!