Financial Management

Time Value of Money

Learning Outcomes
At the end of the lesson, students should be able to
understand:
1. What is Time Value of Money?
2. Present Value (PV), Future Value (FV), Interest
Rate
3. Simple Interest
4. Compound Interest
5. Compounding and Future Value (FV)
6. Discounting and Present Value (PV)
7. Glossary
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1. What is Time Value of Money?

1. Money has time value - a dollar received
today is worth more than a dollar received
in the future (even if it is not very far into
the future).
2. This will be true where:
i. It is certain that the dollar will be
received at the specified time in the
future, e.g. 6 December 2014, Saturday
ii. No inflation to lower the purchasing
power of the dollar to be received in the
future.

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2. Present Value (PV), Future

Value (FV), Interest Rate
Example 1:
1. Today (Present) Date:
6 November 2014, Thursday
Future Date (1 year from todays date):
6 November 2015, Friday
2. Alice lends Betty RM100.
Principal Amount = Present Value = RM100
Alice is a lender. RM100 is Alices lending
amount
Betty is a borrower. RM100 is Bettys
borrowing amount

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2. Present Value (PV), Future

Value (FV), Interest Rate (Cont)
3. From 6 November 2014, Thursday
to 6 November 2015, Friday, Alice (lender):
i. forgoes the use of her money of RM100
ii. delays her gratification/need
4. From 6 November 2014, Thursday
to 6 November 2015, Friday, Betty
(borrower):
i. uses/spends Alices money of RM100
ii. instantly/immediately fulfills her
gratification/need

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2. Present Value (PV), Future

Value (FV), Interest Rate (Cont)
5. On 6 November 2015, Friday, Betty (borrower)
repays Alice (lender)
i. Principal Amount = Present Value = RM100
ii. Interest Amount = RM10
(to reward for Alices delayed gratification,
Betty pays an Interest Rate of 10% per
annum on the borrowing amount of RM100)
iii. Total Repayment Amount
= RM100 + RM10
= RM110 (Future Value)

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3. Simple Interest
1. The Simple Interest amount for 1 year is
calculated as:
Annual Interest Rate x
the original Principal Amount
2. Repayment Amount
= the original Principal Amount
+ Simple Interest
3. Refer to Tutorial Questions 1, 2 and 3
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4. Compound Interest
1. The Compound Interest amount for 1 year
is paid/calculated as
Annual Interest Rate x
the previous Accumulated Amount
2. Repayment Amount
= the previous Accumulated Amount
+ Compound Interest
3. Refer to Tutorial Questions 4, 5 and 6
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5. Compounding and Future Value (FV)

Using Tutorial Questions 4 , 5 and 6 on
Compound Interest
1. Given:
Present Value at Year 0 (PV0) = RM100
Future Value at Year 1 (FV1) = RM110
Future Value at Year 2 (FV2) = RM121
Future Value at Year 3 (FV3) = RM133.10
Interest Rate (i)= 10% per annum

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5. Compounding and Future Value (FV)

2. Mathematically:
FV1 = PV0 (1 + i)1
FV2 = PV0 (1 + i)2
FV3 = PV0 (1 + i)3
FVt = PV0 (1 + i)t
3. Plugging the numbers in the mathematical notations:
FV1
= RM100 (1 + 10%)1
= RM100 (1 + 0.1)1
= RM100 (1.1)1
= RM110
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5. Compounding and Future Value (FV)

4. Plugging the numbers in the mathematical
notations:
FV2
= RM100 (1 + 10%)2
= RM100 (1 + 0.1)2
= RM100 (1.1)2
= RM100 (1.1 x 1.1)
= RM100 (1.21)
= RM121

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5. Compounding and Future Value (FV)

5. Plugging the numbers in the mathematical
notations:
FV3
= RM100 (1 + 10%)3
= RM100 (1 + 0.1)3
= RM100 (1.1)3
= RM100 (1.1 x 1.1 x 1.1)
= RM100 (1.331)
= RM133.10

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6. Discounting and Present Value (PV)

Using Tutorial Questions 4 , 5 and 6 on
Compound Interest
1. Given:
Present Value at Year 0 (PV0) = RM100
Future Value at Year 1 (FV1) = RM110
Future Value at Year 2 (FV2) = RM121
Future Value at Year 3 (FV3) = RM133.10
Interest Rate (i)= 10% per annum

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6. Discounting and Present Value (PV)

2. Mathematically, rearrange to write PV0 on the
left of the equation:
PV0 = FV1__
(1 + i)1
PV0 = FV2__
(1 + i)2
PV0 = FV3__
(1 + i)3
PV0 = FVt__
(1 + i)t

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6. Discounting and Present Value (PV)

3. Plugging the numbers in the mathematical
notations:
PV0
= FV1__
(1 + i)1
= RM110__
(1 + 10%)1
= RM110_
(1 + 0.1)1
= RM110
(1.1)1
= RM100
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6. Discounting and Present Value (PV)

4. Plugging the numbers in the mathematical notations:
PV0
= FV2__
(1 + i)2
= RM121__
(1 + 10%)2
= RM121_
(1 + 0.1)2
= RM121
(1.1)2
= RM121
(1.1 x 1.1)
= RM121
1.21
= RM100

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6. Discounting and Present Value (PV)

5. Plugging the numbers in the mathematical notations:
PV0
= FV3__
(1 + i)3
= RM133.10
(1 + 10%)3
= RM133.10
(1 + 0.1)3
= RM133.10
(1.1)3
= RM133.10
(1.1 x 1.1 x 1.1)
= RM133.10
1.331
= RM100

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7. Glossary
1. Principal Amount
= Investment Amount
= Present Value at Year 0
2. The original Principal Amount
= The initial Principal Amount
3. Repayment Amount
= Future Value

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7. Glossary (Cont)
4. Annual Interest Rate
= Yearly Interest Rate
5. Interest Rate of 10% per annum
= Interest Rate of 10% per year
= Interest Rate of 10% annually
= Interest Rate of 10% yearly
6. Interest amount is calculated
= Interest amount is paid
= Interest amount is charged
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7. Glossary (Cont)
7. PV0 = Present Value at Year 0
PV1 = Present Value at Year 1
PV2 = Present Value at Year 2
PV3 = Present Value at Year 3
PVt = Present Value at Year t
8. FV1 = Future Value at Year 1
FV2 = Future Value at Year 2
FV3 = Future Value at Year 3
FVt = Future Value at Year t
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THANK YOU

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Week 4: Tutorials
Simple Interest
1. Using Example 1. Alice lends Betty RM100,
from 6 November 2014 to 6 November 2017.
The lending/borrowing period is 3 years.
Interest Rate = 10% per annum.
On 6 November 2015,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?
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Week 4: Tutorials (Cont)

Simple Interest
2. Using Example 1. Alice lends Betty RM100,
from 6 November 2014 to 6 November
2017. The lending/borrowing period is 2
years. Interest Rate = 10% per annum.
On 6 November 2016,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?
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Week 4: Tutorials (Cont)

Simple Interest
3. Using Example 1. Alice lends Betty RM100,
from 6 November 2014 to 6 November 2017.
The lending/borrowing period is 3 years.
Interest Rate = 10% per annum.
On 6 November 2017,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?
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Week 4: Tutorials (Cont)

Compound Interest

4. Using Example 1. Alice lends Betty RM100,

from 6 November 2014 to 6 November 2017.
The lending/borrowing period is 3 years.
Interest Rate = 10% per annum.
Interest paid is re-invested/compounded
annually/yearly.
On 6 November 2015,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?

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Week 4: Tutorials (Cont)

Compound Interest

5. Using Example 1. Alice lends Betty RM100,

from 6 November 2014 to 6 November 2017.
The lending/borrowing period is 3 years.
Interest Rate = 10% per annum.
Interest paid is re-invested/compounded
annually/yearly.
On 6 November 2016,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?

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Week 4: Tutorials (Cont)

Compound Interest

6. Using Example 1. Alice lends Betty RM100,

from 6 November 2014 to 6 November 2017.
The lending/borrowing period is 3 years.
Interest Rate = 10% per annum.
Interest paid is re-invested/compounded
annually/yearly.
On 6 November 2017,
What is the Future Value/
Repayment Amount to be paid by Betty?
OR
What is the Future Value/
Repayment Amount to be received by Alice?

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Week 4: Tutorials (Cont)

Simple Interest vs. Compound Interest

7. What are your conclusions after completing

Questions 1 to 6?

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Week 4: Tutorials (Cont)

Compound Interest

8. A sum of RM2.5 million invested for 3 years at

an interest rate of 7.75% per annum. Calculate
the future value of the investment.

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Week 4: Tutorials (Cont)

Compound Interest

9. A sum of RM0.75 million invested for 5 years at

an interest rate of 8.5% per annum. Calculate
the future value of the investment.

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Week 4: Tutorials (Cont)

Compound Interest

10.A sum of RM650,000 invested for 7 years at an

interest rate of 5.75% per annum. Calculate the
future value of the investment.

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Week 4: Updates
1. Attendance List:
Please sign in the box with black or blue pen.
2. Is your Full Name spelt correctly?
3. Is your Student ID recorded correctly?
4. SAJID AHMED IBRAHIM, TP030473?

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Week 4: Updates (Cont)

5. BM056-3.5-2-FMGT-T-2 students:
Only UC2F1410IBM students
6. Who were the 2 students unaware of the 2nd replacement
class on 30 October 2014, Thursday, 1305-1505?
7. If you are Absent with Reason from a class, please inform
Rachel your reason of absence:
8. face-to-face in the next class, OR
9. by sending an email at cheahwaikuan@gmail.com

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Week 4: Updates (Cont)

8. MOHAMMAD NOOR QAWYY HJ JAYAH (TP036886)
Confirm on Absent with Reason:
i. 13 October 2014, Monday, 12:10-13:10, Lecture
Arrived in Malaysia from Brunei
ii. 14 October 2014, Tuesday, 16:00-18:00, Tutorial 1
Did medical check-up

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Week 4: Updates (Cont)

9. Individual Assignments Due Date is the same. It falls
in Week 10.

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Week 4: Updates (Cont)

10. Class Test (Week 13, 90 minutes):

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