TIME VALUE of Money

Lump-sum

• 𝐹𝑉𝑛 = 𝑃𝑉 ( 1 + 𝑖 )𝑛
𝐹𝑉 −𝑛
• 𝑃𝑉 = 𝑛 = 𝐹𝑉 ( 1 + 𝑖 )
( 1+𝑖 )
𝐹𝑉 1
• 𝑖 = ( )𝑛 − 1
𝑃𝑉
𝐹𝑉
𝐼𝑛 ( )
•𝑛 = 𝑃𝑉
𝐼𝑛 ( 1+𝑖 )
Ordinary Annuity Annuity Due
1+𝑖 𝑛 −1 • 𝐹𝑉𝑛 = 𝐹𝑉𝐴𝑛 1 + 𝑖
• 𝐹𝑉𝐴𝑛 = 𝑃𝑀𝑇 [ ]
𝑖 1+𝑖 𝑛 −1
• 𝐹𝑉𝑛 = 𝑃𝑀𝑇 (1 + 𝑖)
𝑖

1 − 1+𝑖 −𝑛 • 𝑃𝑉 = 𝑃𝑉𝐴𝑛 1 + 𝑖
• 𝑃𝑉𝐴𝑛 = 𝑃𝑀𝑇
𝑖
1 − 1+𝑖 −𝑛
• 𝑃𝑉 = 𝑃𝑀𝑇 1+𝑖
𝑖
Perpetuity

𝑃𝑀𝑇
• 𝑃𝑉 =
𝑖
You are hoping to buy a house in the future and recently received an
inheritance of Php1M. You intent to use your inheritance as a down
payment on your house.
a. If you put your inheritance in an account that earns a 7% interest
rate compounded annually, how many years will it be before your
inheritance grows to P1.5M.
b. If you let your money grow for 10.25 years at 7%, how much will
you have?
c. How long will take your money to grow to P1.5M if you move it into
an account that pays 3% compounded annually? How long will it
take your money to grow to P1.5M if you move it into an account
that pays 11%?
d. What does all of this tell you about the relationship among interest
rates, time and future sums?
Sulli Wulli would like to make a single investment and have P10 million
at the time of her retirement in 35 years. She has a mutual fund that
will earn 4 percent annually. How much will Sulli have to invest today?
What is Sulli were a finance major and learned how to earn a 14
percent annua return? How soon could she then retire?
• Jeon JK received P246,900 for his services as financial consultant to
the mayor’s office of his hometown of Springfield. JK says that his
consulting work was his civic duty and that he should not receive any
compensation. So, he has invested his paycheck into an account
paying 3.98 percent annual interest and left the account in his will to
the city of Springfield on the condition that the city could not collect
any money from the account for 200 years. How much money will the
city receive from JK’s generosity in 200 years?
• Your father just gave you P12,000. You’d like to see what it might grow
to if you invest it. Calculate the future value of P12,000 given that it
will be invested for 5 years, compounded semiannually, at an annual
interest rate of 6%.
• Jimin, who has been married for 23 years, would like to buy his wife
an expensive diamond ring with a platinum setting on their 30-year
wedding anniversary. Assume that the cost of the ring will be
P600,000 in seven years. Jimin currently has P225,500 to invest. What
annual rate of return must Jimin earn on his investment to
accumulate enough money to pay for the ring?
• Adam asked Eve to marry him, and she has accepted under one
condition: Adam must buy her a new $330,000 Rolls-Royce Phantom.
Adam currently has $45,530 that he may invest. He has found a
mutual fund that pays 4.5 percent annual interest in which he will
place the money. How long will it take Adam to win Eve’s hand in
marriage?
• You are graduating from college at the end of this semester and
decided to invest P5,000 at the end of each year in a mutual fund for
the next 45 years. If you earn 8 percent compounded annually on
your investment, how much will you have when you retire in 45
years? How much will you have if you wait 10 years before beginning
to save and only make 35 payments into your retirement account?
• To pay for your education, you’ve taken out P50,000 in student loans.
If you make monthly payments over 15 years at 7 percent
compounded monthly, how much are your monthly student loan
payments?
• Your folks just called and would like some advice from you. An
insurance agent just called them and offered them the opportunity to
purchase an annuity for P1,053,712.5 that will pay them P150,000 per
year for 20 years, but they don’t have the slightest idea what return
they will be making on their investment of P1,053,712.5. What rate or
return will they be earning?