CSTC COLLEGE OF SCIENCES TECHNOLOGY AND COMMUNICATION, INC.

CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
Atimonan Contact Number: 042 7171420

SCHOOL OF BUSINESS AND ACCOUNTANCY

Instructional Module in

FM112/MAS102A

Financial Management

STUDENT
Name:
Student Number:
Course/Year/Major:
Address:
Email Address:
Contact Number:

PROFESSOR
Name: Glazy Kae N. Navajas
Email Address: glazy.kae@gmail.com
Contact Number: 09484436339
 CSTC COLLEGE OF SCIENCES TECHNOLOGY AND COMMUNICATION, INC.
CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
Atimonan Contact Number: 042 7171420

SCHOOL OF BUSINESS AND ACCOUNTANCY

Preliminaries
I. Module Number 1
Module Title Financial Management for Prelim
II. Brief Introduction This module is designed to cover the introduction to
financial management such as its nature, purpose and scope. This module includes
the discussion of effects of the economic environment on business strategy.

III. Module Outcomes

Upon completion of this module, you must be able to:
1. Describe the nature, goal and basic scope of financial management
2. Explain briefly the three major types of decisions that the Finance Manager makes.
3. Discuss the importance or significance of financial management.
4. Describe the relationship between Financial Management and Accounting.
5. Describe the relationship between Financial Management and Economics.
 CSTC COLLEGE OF SCIENCES TECHNOLOGY AND COMMUNICATION, INC.
CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
Atimonan Contact Number: 042 7171420

Lesson Number 3
Lesson Title Time Value of Money

This lesson covers the discussion of the time value of money (future and present)
and how it impacts business decisions.

Lesson Objectives
At the end of this lesson, you will be able to:
1. Appreciate the time value of money (future and present)
2. Compute for the present and future value of money.
3. Compute the present value of a perpetuity and how to determine the compound
annual growths or interest rate.

Introduction/Discussion of Content

Interest - the cost of using money over time.

- represents the time value of money.
- it is the excess of resources (usually cash) received or paid over the amount
of resources loaned or borrowed is called the principal.

Interest expense - The cost of the excess resources to the borrower for the use of the
money.

Interest revenue - The benefit of the excess resources to the lender of the money.

Time value of money involves two major concepts:

1. Future value
2. Present value.

Both concepts consider three factors

1. principal,
2. interest rate, and
3. time period.

Simple interest - is the product of the principal amount multiplied by the period's interest
rate (a one year rate is standard).

SIMPLE INTEREST
Example: ABC Corporation deposits P10,000 in a bank at 10 percent interest a year.
One year later the P10,000 will have grown to P11,000: P10,000 is principal and P1000
is interest. The amount of interest is determined by multiplying the interest rate of 10
percent (0.10 in decimal notation) by the principal of P10,000 (0.10 x P10,000= P1,000).
Thus, the value of a peso today can increase in the future because of the interest.

Principal (beginning balance) P10,000.00

Interest for year 1 to 10 percent
(0.10 x P1,000= P100.00) 1,000.00
Future value at the end of year 1 P11.000.00
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
Atimonan Contact Number: 042 7171420

Figure 1. Future value of P10,000 invested at 10 percent for one year

COMPOUND INTEREST
Compound interest - is the interest paid on both the principal and the amount of interest
accumulated in prior periods. The process of determining future value when compound
interest is applied is called compounding

Example 2: Now suppose that ABC Corporation leaves its P10,000 on deposit for two
years in a bank paying 10 percent annual interest. At the end of the first year, the initial
deposit becomes P11,000. During the second year, the firm will earn 10 percent on this
P11,000, or an additional P1,100 in interest. The firm is earning interest on the changing
balance. Hence, at the end of the second year, the firm will have P12, 100 in its
account.
Balance at the beginning of year 2 P11,000.00
Interest for year 2 at 10 percent
(0.10 xP1,100= P110.00) 1,100.00
Future value at the end of year 2 P12.100.00

Figure 2. Future value of P10,000 invested at 10 percent compound interest for two
years

SIMPLE INTEREST COMPARED WITH COMPOUND INTEREST

Two types of interest:
1. Simple interest - is the interest paid or earned on the initial principal only.
2. Compound interest - is the interest paid on both the principal and the amount
of interest accumulated in prior periods.

Compounding - The process of determining future value when compound interest is

applied.

Using compound interest usually results in a greater future value than using
simple interest.

Example 3 - The financial manager has the choice of leaving P1,000 with a bank paying
10 percent simple interest or 10 percent compound interest for five years. With simple
interest, the financial manager earns 10 percent interest each year on the principal of
P1,000 for a total of P500 (0.10 x P1.000 x 5). With compound interest, the amount of
interest earned increases each year because the beginning amount upon which the
interest is calculated increases each year. Compound interest totals P610.51 after five
years. The P110.51 difference in interest favors compound interest. The calculation of
simple and compound interest is shown below.
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
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Beginning Simple Ending Beginning Compound Ending

Amount Interest Amount Amount Interest Amount
Year [0.10x (1)] [(1)+(2)] [0.10 x (4)] [(4)+ (5)]
(1) (2) (3) (4) (5) (6)
1 P1,000.00 P100.00 P1,100.00 P1,000.00 P100.00 P1,100.00
2 1,000.00 100.00 1,200.00 1,100.00 110.00 1,210.00
3 1,000.00 100.00 1,300.00 1,210.00 121.00 1,331.00
4 1,000.00 100.00 1,400.00 1,331.00 133.10 1,464.10
5 1,000.00 100.00 1,500.00 1,464.10 146.41 P610.51
Total P500.00 P610.51
interest

FUTURE VALUE (ANNUAL COMPOUNDING)

FVn = PV (1+ i)n

Future value (FVn) is equal to the initial principal amount (PV), compounded at the
interest rate (i) for periods (n).

Example 4. The future values of P1,000 compounded at a 10 percent annual interest

rate at the end of one year, two years, and five years are computed as follows:

Substituting PV = P1,000 and i = 0.10 for different values of n produces the following
results.

Year Calculation Future Value

1 FV1 = (P1,000)(1+ 0.10)1 P1,100.00
2 FV2 = (P1,000)(1+0.10)2*
= (P1,000)(1.21) = 1,210.00
5 FV5 = (P1,000)(1+0.10)5**
= (P1,000)(1.61051) = 1,610.51

* (1.10) 2 = (1.1) (1.1) = 1.21

** (1.10) 5 = (1.1) (1.1) (1.1) (1.1) (1.1) = 1.61051

DETERMINATION OF FUTURE VALUE USING A TABLE

Instead of computing the value of the term (1 + i) n, you can use a table to find
this value. The value is called the future value interest factor or FVIFi,n and may be
viewed as the result of investing or lending P1 at interest rate (i) for (n) periods. The
values of the FVIF’s for different interest rates and time periods are shown in Table 1.

FVn = PV (FVIFi,n)
Example 5: Using the equation above and Table 1, the future value of P1,000
compounded for five years at 10 percent interest rates is computed as follows.
First, we need to find the value in Table 1 that corresponds to the intersection of
a 10 percent interest rate with compounding for five years, that is, FVIF0.10,5. This value
 CSTC COLLEGE OF SCIENCES TECHNOLOGY AND COMMUNICATION, INC.
CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
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is 1.611 (1.61051) and represents the calculation (1.10)5. Now, substitute 1.611 in the
above equation to find the future value.

FV5 = (P1,000) (1.611)

= P1,611.00

Example 6: Using Table 1, how long would it take to double money at a 10 percent
interest rate?
The first step would be to search the 10 percent column in Table 1 to locate the
future value interest factor that is closest to 2.0 The closest number is 1.949 (1.94872).
Hence, money doubles in slightly over seven years when compounded at 10 percent
annually.

FUTURE VALUE (WITH INTRAPERIOD COMPOUNDING)

Intraperiod compounding - Compounding that occurs more than once a year.
Compounding period - The calendar period over which compounding occurs.

For example, compounding may occur annually, semiannually, quarterly, or

monthly. When using intraperiod compounding, the future value formula must be
modified to reflect the number of times per year compounding occurs, denoted by m

𝑖
FVn = PV {1 + 𝑚}mn
Example 7: Instead of placing P1,000 in Atlanta Bank that pays 10 percent interest
annually, the financial manager decides to put the money in National Bank that pays 10
percent interest compounded semi-annually. Between the two banks, there would be a
difference in the future value of your investment after one year.
Atlanta Bank National Bank
Annual Compounding Semiannual Compounding
1
FV1 =(P1,000)(1 + 0.10) FV1 = (P1,000( 1+ 0.10/2)(2)(1)
= (P1,000)(1.10) = (P1,000)(1.1025)
= P1,100.00 = P1,102.50

Now, subtract P1,100 from P1,102.50 to find the difference in future values of
P2.50. Thus, more interest is earned with semiannual compounding than with annual
compounding.

NOMINAL INTEREST RATE COMPARED WITH EFFECTIVE INTEREST RATE

Nominal interest rate - is simply the stated rate, such as 10 percent.
Effective interest rate - also called the annual percentage rate or APR
- is the true interest rate and may differ from the nominal rate depending on
the frequency on compounding.

𝑖
APR = {1 + 𝑚}m -1
The equation above is used to find the effective interest rate. In this equation, i is
the nominal rate and m is the number of compounding periods per year.

Example 8: Disney Incorporated deposits money in a bank that pays a 10 percent

nominal interest rate and compounds interest semiannually.
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
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Registrar’s Office: 042 3290850 / 042 7192818
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Substituting i= 0.10 and m =2 will result to:

0.10 2
APR= {1+ } -1
2
2
= (1.05) -1
= 1.1025- 1
= 0.1025 or 10.25 percent

Initial Investment Compounding Future Value Effective Annual

Period Interest Rate
P1,000 Annually P1,100.00 10.00%
1,000 Semiannually 1,102.50 10.25
1,000 Quarterly 1,103.81 10.38
1,000 Monthly 1,104.71 10.47
1,000 Daily 1,105.16 10.52
Figure 3. Comparison of results of different compounding periods for P1,000
invested at a 10 percent interest rate for one year.

DETERMINATION OF THE FUTURE VALUE OF A STREAM OF PAYMENTS

The concept of future value can be extended beyond compounding a single
payment to compounding a series, or stream of payments.

FUTURE VALUE DETERMINATION INVOLVING STREAM OF UNEQUAL

PAYMENTS
Calculating the future value of an unequal stream of payments involves finding
the future value of each payment at a specified future date and then summing these
future values.

𝐹𝑉𝑛 = ∑ 𝑃𝑡 (1 + 𝑖 )n −t
𝑡=0

Figure 4. Future Value of an Unequal Series of Payment

The sigma (Σ) notation is a mathematical symbol for summing a series of values.
The future value of a time period (FVn) is found by adding up each payment (Pt)
adjusted for the number of periods in which interest is earned. The exponent (n-t)
indicates the number of periods in which interest is earned.
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
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Registrar’s Office: 042 3290850 / 042 7192818
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Example 9: A firm plans to deposit P2,000 today and P1,500 one year from now at
Mount Carmel Rural Bank. No future deposits or withdrawals are made and the bank
pays 10 percent interest compounded annually. The future value of the account at the
end of four years is computed to be:

FV4 =(P2,000)(1.10)4 + (P1,500)(1.10)3

= (P2,000)(1.464) + (P1,500)(1.331)
= P2,928.00 + P1,996.50
= P4,924.50

FUTURE VALUE DETERMINATION INVOLVING STREAM OF EQUAL PAYMENTS

A stream of equal payments made at regular time intervals is an annuity,
sometimes called a fixed annuity. There are two types of fixed annuities.
1. Ordinary annuity is one in which the payments or receipts occurs at the end
of each period. This type of annuity is also called a regular or deferred annuity.

FVOAn= A (FVIFAi,n)

FVOA = future value of an ordinary annuity

A = the amount of the fixed annuity payment
FVIFAi,n = future value interest factor of an annuity for interest rate (i), and time period
(n)

Example 10: Crystal Corporation deposits P1,000 at the end of each of three
consecutive years in a bank account paying 10 percent interest compounded annually.
The value of the account at the end of the third year is computed by, first, substituting A
= P1,000, i = 1.10, and n=3.
(1+r)𝑛−1
FVIFAi,n = PV { }
𝑟

FVOA3 = (P1,000) (FVIFA0.10,3)

= (P1,000) (3.310)
= P3,310

Figure 5. Future value of an ordinary annuity for three years with 10 percent annual
compounding

2. Annuity due is one which payments or receipts occur at the beginning of each
period.

FVADn = A (FVIFAi,n) (1 + i)
FVADn = future value of an annuity due
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Example 11: Instead of depositing P1,000 at the end of each year for three consecutive
years, the firm makes deposits at the beginning of each year. Interest is compounded
annually at 10 percent. How much will the firm have in account after three years?
Substitute A = P1,000, i = 0.10, and n =3.

FVAD3 = (P1,000) (3.310) (1.10)

= (P1,000) (3.641)
= P3,641

The future value for the annuity due (P3,641) is greater than that for the ordinary
annuity (P3,310) because each deposit is made one year earlier and consequently
earns interest one year longer.

Figure 10-6. Future value of an annuity due (FVADn) for three years with 10 percent
annual compounding

PRESENT VALUE

Present value - is the current value of a future amount of money, or series of payments,
evaluated at an appropriate discount rate.
Discount rate - sometimes called the required rate of return, is the rate of interest that is
used to find present values.

DISCOUNTING - The process of determining the present value of a future amount

Future value determination compounds money forward in time to
determine its worth in the future. Present value determination discounts
money that will be received in the future back in time to see what it is
worth in the present.

FVn 1
PV = (1+𝑖)𝑛 or FVn {(1+𝑖)𝑛}
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
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Registrar’s Office: 042 3290850 / 042 7192818
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Example 12. Blueberry Company expects to receive P1,100 one year from now. What is
the present value of this amount if the discount rate is 10 percent?
Substitute i = 0.10 and n = 1, FV = P1,100.
P1,100
PV = (1.10)1 = P1,000.00
or

1
PV = (P1,100) {(1.10)1 }

= (P1,100) (0.9091)
= P1,000.01

Figure 7. Present value of P1,000 received at the end of one year discounted at 10
percent

Compounding P1,000 at a 10 percent interest rate for one year provides a future
value P1,100. This example shows that discounting P1,100 at 10 percent yields a
present value of P1,000. The P0.01 difference is caused by rounding the term in
brackets.

DETERMINATION OF PRESENT VALUE USING A TABLE

PVIFi,n is called a present value interest factor for discount rate i and time period
n
PV = FVn (PVIFi,n)

Example 13: JGC Company expects to receive P1,000 five years from now and wants
to know what this money is worth today. The value today of P1,000 to be received five
years from now discounted at 10 percent is calculated as follows:
1
PVIFi,n = (1+𝑟)𝑡

Substitute i = 0.10 and n = 5, PV5 = P1,000.

PV = (P1,000) (0.621)
= P621.00

DETERMINATION OF THE PRESENT VALUE OF A STREAM OF PAYMENTS

Like future value, present value can also be applied to a stream of payments or
receipts rather than to a single amount.

PRESENT VALUE DETERMINATION INVOLVING STREAM OF UNEQUAL

PAYMENTS
To find the present value of an unequal, or mixed, stream of payments, simply
calculate the present value of each future amount separately and then add these
present values together.
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
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PV = ∑𝑛𝑡=1 Pt(PVIFi, t)
Example 14: MNM Company expects to receive payments of P1,000, P1,500, and
P2,000 at the end of one, two and three years, respectively. The present value of this
stream of payments discounted at 10 percent is computed as follows.
Substitute i = 0.10 and t = 1, 2, 3 and solve the equation.

PV = (P1,000) (0.909) + (P1,500) (0.826) + (P2,000) (0.751)

= P909 +P1,239 +P1,502
= P3,650.00

PRESENT VALUE DETERMINATION INVOLVING STREAM OF EQUAL PAYMENTS

The present value of an equal stream of payments (PV n), is found by using the
equation below. In this equation, the annuity payment, A, is multiplied by the term in
brackets, which is the sum of the individual present value interest factors.

1
PVOAn= A {∑𝑛𝑡=1 (1+𝑖)𝑡 }

A table can also be used to solve for PVn. To do this, rewrite the equation above
by replacing the term in brackets with a calculated value called the present value
interest factor of an annuity (PVIFAi,n).

PVOAn= A (PVIFAi,n)
1
PVIFAi,n = 1 – ((1+𝑟)𝑛 ) /r

Example 15:Summer Corporation expects to receive P1,000 at year's end for the next
three years. The present value of this annuity discounted at 10 percent is computed as
follows.
Substitute i=0.10, n = 3, and A = P1,000.
PVOA3= (P1,000) (PVIFA0.10,3)
= (P1,000) (2.487)
= P2,487.00

Figure 8. Present value of a P1,000 annuity for three years with a 10 percent discount
rate

Note: The P1 difference between P2,487 and P2,486 is due to rounding.

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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
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DETERMINATION OF THE PRESENT VALUE OF A PERPETUITY

The time value of money concept has many applications besides finding the
future or present value of a single amount or of a stream of payments or receipts. One
application is determining the present value of perpetuity.

Perpetuity - is an annuity with an infinite life; that is, the payments continue indefinitely.
The present value of a perpetuity is found by using the equation below.

𝐴𝑛𝑛𝑢𝑖𝑡𝑦 (𝐴)
PV of a perpetuity= 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑅𝑎𝑡𝑒 (𝑖)

Example 16: Honey Dew Corporation wants to deposit an amount of money in a bank
account that will allow it to withdraw P1,000 indefinitely at the end of each year without
reducing the amount of the initial deposit. If a bank guarantees to pay the firm 10
percent interest on its deposits, the amount of money the firm has to deposit is
computed as follows:
Substitute A = P1,000 and i = 0.10 and solve.

P1,000
PV of a perpetuity = = P10,000
0.10
GROWTH RATES
Another application of the time value of money concept is calculating the
compound annual growth or interest rate (i), of a stream of payments or receipts The
equation below shows how to compute this rate when the growth rate is constant. In this
formula, n represents the number of compounding periods during which the growth
takes place. Dividing the ending amount by the beginning amount gives the FVIF i,n

𝐸𝑛𝑑𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 (𝐹𝑉𝑛)

FVIFi,n = 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑎𝑚𝑜𝑢𝑛𝑡 (𝑃𝑉)

Example 17: Sugar Company has steadily increased its dividends per share from P1.00
in 2007 to P1.36 in 2011. The annual compound growth rate of these dividend
payments over the four years is computed as follows.

Divide P1.36 (ending amount) by P1.00 (beginning amount) which gives 1.36.
Now, locate 1.36 in the 4 period rows in Table 1. Notice that 1.36 is in the 8 percent
column when n equals 4 years; thus, the annual compound growth rate of the dividend
payments is 8 percent.

References
• Cabrera, Ma. Elenita (2012-2013). Financial Management Principles and
Applications Comprehensive Volume. GIC Enterprises
• Bautista, Precila R. Bautista (2018). Simplified Approach To Financial
Management. Unlimited Books Library Services &
• Valencia, Edwin (2015). Basic Accounting. Valencia Educational Supplies Baguio
City Philippines
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CSTC College Bldg. Gen. Luna St. Maharlika Hi-way, Pob. 3, Arellano Sub. Sariaya Province of
Quezon R4A
Registrar’s Office: 042 3290850 / 042 7192818
CSTC IT Center: 042 7192805
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Prepared by: Reviewed by:

GLAZY KAE N. NAVAJAS, LPT MARK ANTHONY C. DELGADO, CPA, LPT, MBA
Instructor Academic Coordinator, SBA

Validated by: Approved by:

NONA BHEL S. LIMBO, DBA JESS JAY M. SAJISE, DBA

Dean, SBA Vice President for Academic Affairs