Republic of the Philippines

Department of Education
Region III – Central Luzon
Tarlac City Schools Division
Tarlac West A District
MALIWALO NATIONAL HIGH SCHOOL
Maliwalo, Tarlac City

Calculate Future Value and

Present Value of Money

Submitted by:

Diana Rose S. Valencia

12 ABM B- Drucker

Submitted to:

Mrs Vivianlyn Francisco

“Business Finance Teacher”
What is the Time Value of Money?

The time value of money is a basic financial concept that holds that money in the present
is worth more than the same sum of money to be received in the future. This is true because
money that you have right now can be invested and earn a return, thus creating a larger amount
of money in the future. (Also, with future money, there is the additional risk that the money may
never actually be received, for one reason or another.) The time value of money is sometimes
referred to as the net present value (NPV) of money.

Future Value vs. Present Value

Present value (PV) is the current value of a future sum of money or stream of cash flows
given a specified rate of return. Present value takes the future value and applies a discount rate or
the interest rate that could be earned if invested.

Future value tells you what an investment is worth in the future while the present value
tells you how much you'd need in today's dollars to earn a specific amount in the future.

What is Future Value (FV)?

Future value (FV) is the value of a current asset at a future date based on an assumed rate
of growth. The future value (FV) is important to investors and financial planners as they use it to
estimate how much an investment made today will be worth in the future. Knowing the future
value enables investors to make sound investment decisions based on their anticipated needs.
However, external economic factors, such as inflation, can adversely affect the future value of
the asset by eroding its value.

Types of Future Value

Future Value Using Simple Annual Interest

 Simple interest is calculated on the principal, or original, amount of a loan.

The Future Value (FV) formula assumes a constant rate of growth and a single upfront
payment left untouched for the duration of the investment. The FV calculation can be done one
of two ways depending on the type of interest being earned. If an investment earns simple
interest, then the Future Value (FV) formula is:

FV = I x (1 + (R x T))

Where:

 I = Investment Amount
 R = Interest Rate
 T = Number of years

For example, assume a $1,000 investment is held for five years in a savings account with
10% simple interest paid annually.
FV = $1,000 * [1 + (0.10 x 5)]

FV = $1,000 * [1 + (0.5)]

FV = $1,000 * (1.5)

FV = $1,500

Future Value Using Compounded Annual Interest

 Compound interest is calculated on the principal amount and also on the accumulated
interest of previous periods, and can thus be regarded as “interest on interest.”

With simple interest, it is assumed that the interest rate is earned only on the initial
investment. With compounded interest, the rate is applied to each period's cumulative account
balance.

Formula For Future Value Using Compounded Annual Interest

FV = PV (1 + R)T

In this formula,

PV is how much she has now, or the present value

R equals the interest rate she will earn on the money

T equals the number of periods she will put the money away; and

FV equals how much she will have at the end, or future value.

Example:

Let's imagine that Donna puts $100 in the bank for five years at five percent interest, and
plug that into the equation.

FV = 100 (1 + 0.05)5

FV = 100 * 1.2762

FV = $127.62

What Is Present Value – PV?

Present value (PV) is the current value of a future sum of money or stream of cash flows
given a specified rate of return. Future cash flows are discounted at the discount rate, and the
higher the discount rate, the lower the present value of the future cash flows. Determining the
appropriate discount rate is the key to properly valuing future cash flows, whether they be
earnings or obligations.

Formula for Present Value

PV= FV/ (1+r)n

Where:

PV= Present Value

FV=Future Value

r=Rate of return

n=Number of periods

Example:

Donna's parents think she's a pretty smart girl, especially after she shows her Dad these
cool formulas. Dad knows he will need money in a few years to pay for Donna's college. He's
wondering how much he can invest today in some CDs that would be worth $20,000 or so in 10
years when he'll need it. Donna shows him a formula for present value, or how much you need
to save today to have a specific amount at some point in the future.

So, if Dad needs the $20,000 in 10 years and can invest what he has for five percent, let's find
out how much he needs to invest today.

PV = $20,000 / (1.05)10

PV = $20,000 / 1.6289

PV = $12,278