Fm1-Financial Management Finals Handouts: Lesson 1-Time Value of Money Analysis

FM1-FINANCIAL MANAGEMENT
FINALS HANDOUTS
TOPICS:
1. TIME VALUE OF MONEY ANALYSIS
2. RULE OF 72
3. PAYBACK PERIOD
LESSON 1-TIME VALUE OF MONEY ANALYSIS

VIDEO LECTURE LINKS:
https://drive.google.com/file/d/1EX_PM-FyxioB-cw9AehpB9TicufeLFt6/view?
usp=sharing
https://drive.google.com/file/d/1Fi2ra1seg0P8a-2IGFOzYSyA2y5GrUAn/view?
usp=sharing
When to use TVMA:

*evaluating project proposal
*assessing acquisition or leasing of equipment
*managing and valuing cash funds
*managing and valuing receivables
*managing and valuing long-term obligations
FUTURE VALUE
FV = PV(1+i)
n
n
where:
FV is the future value of an amount
n is the number of periods
PV is the present value of an amount
i is the interest
SIMPLE INTEREST
-interest earned only on the original investment
-no interest is earned on interest
FORMULA: I=PRT
I= interest
P= principal amount/ present value of the amount invested
R= interest rate
T= time
EXAMPLE:
*You have PHP 10,000 in a bank account. Assume that BDO is currently
paying an interest rate of 0.25% per annum on deposits. How much is the
interest earned?
I=PRT
= (10,000)(.0025)(1)
I= PHP 25.00
How much is the value of investment?

FORMULA:
Value of Investment= Principal + Interest in peso
Value of Investment= 10,000+25
= 10,025
FUTURE VALUE
-amount to which an investment will grow after earning interest
FORMULA:
FUTURE VALUE= PV(1+r)ᵀ
FV= 10,000(1+.0025)¹
= 10,025
PROBLEM:
-Suppose that Peter Minuit did not become the first New York real estate
tycoon but instead had invested his $24 at a 5% interest rate in New
Amsterdam Savings Bank. What would have been the balance in his account
after 5 years? 50 years?
Answer:
FV=24(1+.05) =30 5
FV=24(1+.05) =275.22
50
Which account produces the largest sum? An account that compounds

semiannually, quarterly or monthly?
PERIOD= # of years * 2(semiannual)
4(quarterly)
12(monthly)
INTEREST RATE/ 2(semiannual)
4(quarterly)
12(monthly)
PROBLEM:
Find the future value of Sophia Corporation with a 100,000 investment. The
investment is good for 5 years with 6% annual interest.
PERIOD= 5 years * 2(semiannual) = 10
4(quarterly)= 20
12(monthly) = 60
INTEREST RATE
6%/ 2(semiannual) = 0.03
4(quarterly) = 0.015
12(monthly) = 0.005
SOLUTION:
PRESENT VALUE
-a peso today is worth more than a peso tomorrow
-how much do we need to invest now in order to produce a specific amount at
the end of the year
-value today of a future cash flow
PRESENT VALUE
PV = FV (1/(1+i)
n
n
where:
PV is the present value
n is the period
i is the interest
FV is the future value
PROBLEM:
Suppose that Coca-cola had promised to pay PHP 1,000 at the end of 10 years.
If the market interest rate were 8.53%, how much would you have been
prepared to pay for a 10-year IOU of PHP 1,000?
PVn= FV (1/(1+.0853) 10
= 441.06
PERPETUITIES
-stream of level cash payments that never ends
FORMULA:
PV of PERPETUITY = C/r = Cash payment/ interest rate
PROBLEM:
Assume that the PH government with a perpetuity pay of PHP 50,000 a year
forever at a discount rate of 5%.
PV of PERPETUITY= 50,000/.05
= 1,000,000
LESSON 2: THE RULE OF 72

VIDEO LECTURE LINK:
https://drive.google.com/file/d/16iGvllML3ep_s1WhHJBolu2lBi6H2OGx/view?
usp=sharing
RULE OF 72
-an easy shortcut to approximate the effect of compound interest
-useful for providing a quick and general idea of how compound rates affect
money
-a rule stating that in order to find the number of years required to double your
money at a given interest rate, you divide the compound return into 72. The
result is the approximate number of years that it will take for your investment
to double.
FORMULA:
72/ R = Y
where:
72 is constant
R is the expected growth rate of an investment
Y is the number of years it would take for your investment to double
Example:
If Lia puts her money which is worth Php 10,000.00 in a bank, with an annual
return of .025%. How many years would it take for her money to double?
72 / .025 = 2880
analysis: if Lia puts her money in a bank, it would take 2880 years to double
her money
LESSON 3- PAYBACK PERIOD

VIDEO LECTURE LINK:
https://drive.google.com/file/d/1sDgtj-XN1bupCQ1oHFtHJWBfh5101Ibv/view?
usp=sharing

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FM1-FINANCIAL MANAGEMENT

LESSON 1-TIME VALUE OF MONEY ANALYSIS

When to use TVMA:

How much is the value of investment?

Which account produces the largest sum? An account that compounds

LESSON 2: THE RULE OF 72

LESSON 3- PAYBACK PERIOD

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