TIME VALUE OF MONEY 1

Prepared by: Halimahton bt Kamarudin

LEARNING OBJECTIVES
After this class the students should be able to:
Understand the concept of time line Understand the difference between compound

and simple interest Define present value Define future value Define an annuity Define uneven cash flows streams

WARM-UP
Malaysian inflation rate?

WARM-UP
If RM100 is deposited in a saving account that

pays 5% annual interest, what amount has accumulated by the end of the eight year?

INTRODUCTION
Money has a time value

One RM/$/ today is worth more than one RM/$/

tomorrow. Failure to pay the bills results in additional charge termed.

INTEREST
Is usually expressed as a percentage of the

amount owed. Due for example; monthly, annually, quarterly, weekly. Example: If RM1,000 is borrowed at 14% interest, then interest on the principal of RM1,000 after one year is 0.14 x RM1,000 = RM140 a year.

TYPES OF INTEREST RATE

SIMPLE VS. COMPOUND INTEREST Engineering economy use Compound interest. Terminology:

i = interest rate per year / period n = number of years PV = present value FV = future value

SIMPLE INTEREST
With simple interest, the interest calculated for

years 2,3,. is based on the initial deposit. There is no interest computed on the accrued interest.

COMPOUND INTEREST
The standard assumption is that interest is

computed on the current balance which includes accrued interest that has not yet been paid.

TIME VALUE OF MONEY

TIME LINE

Example: If you deposit RM10,000 into your

account now, how much that you will have in year 5 in total if interest is 6% a year.

0 10,000

2 i= 6%

4 FV= ?

n=5

TVM
Single payment

An annuity
Ordinary : an annuity whose payments occur at the

end of each period Annuity Due : an annuity whose payment occur at the beginning of each period

Uneven cash flows streams

A series of cash flows in which the amount varies

from one period to the next.

SINGLE PAYMENT
PRESENT VALUE

Formula: PV=FV (PVIFi,n)

PV FV PVIF n i = Present Value = Future Value = Table A2 = Number of period = Interest rate

Example: If your target is to get RM10,000 in 4

years with 8% interest rate, what amount should you deposit now in purpose to achieve the target?

SINGLE PAYMENT
FUTURE VALUE

Formula: FV=PV (FVIFi,n)

PV FV PVIF n i = Present Value = Future Value = Table A1 = Number of period = Interest rate

Example: What is the amount that you will receive if

you deposit RM20,000 now for 4 years at 6%?

AN ANNUITY
PRESENT VALUE (ORDINARY) Formula: PVA =PMT (PVIFAi,n) PVA = Total of Present Value / Lump sum amount PMT = Payment (equal amount, happen more than one time with specified period) PVIF A = Table A4 n = Number of period i = Interest rate
Example: Mr Ong has RM100,000 in a saving account

that offers 10% interest rate compounded annually. He plans to withdraw the money within 5 years. Determine the amount he can withdraw every year from the account if he makes the withdrawal at the end of the year ?

AN ANNUITY
PRESENT VALUE (AN ANNUITY DUE) Formula: PVA =PMT (PVIFAi,n) (1 + i) PVA = Total of Present Value / Lump sum amount PMT = Payment (equal amount, happen more than one time with specified period) PVIF A = Table A4 n = Number of period i = Interest rate
Example: Mr Ong has RM100,000 in a saving account

that offers 10% interest rate compounded annually. He plans to withdraw the money within 5 years. Determine the amount he can withdraw every year from the account if he makes the withdrawal at the beginning of the year ?

AN ANNUITY
FUTURE VALUE (ORDINARY)

Formula: FVA =PMT (FVIFAi,n)

FVA = Total of Present Value / Lump sum amount PMT = Payment (equal amount, happen more than one time with specified period) PVIF A = Table A3 n = Number of period i = Interest rate
Example: Ahmad is asked to invest RM500 at the

end of each year for the next 5 years at interest rate of 6%. How much money should be available at the end of the investment period?

AN ANNUITY
FUTURE VALUE (ANNUITY DUE) Formula: FVA =PMT (FVIFAi,n) (1 + i)
FVA PMT time with PVIF A n i = Total of Present Value / Lump sum amount = Payment (equal amount, happen more than one specified period) = Table A3 = Number of period = Interest rate

Example: Ahmad is asked to invest RM500 at the end of

each year for the next 5 years at interest rate of 6%. How much money should be available at the beginning of the investment period?

UNEVEN CASHFLOWS STREAMS

PRESENT VALUE Formula: PVn = CF (PVIFi, t) PVn = Total of Present Value CF = Cash Flows (uneven number, happen more than one time) PVIF = Table A2 t = Current period i = Interest rate
Example: You expect to get inflow of RM10,000 in

year 1, RM20,000 in year 2,3,4,5 (each year) and RM100 000 in year 6. Find the present value these cash flows. Interest is 10% annually.

UNEVEN CASHFLOWS STREAMS

FUTURE VALUE Formula: FVn = CF (FVIFi, n - t) PVn = Total of Present Value CF = Cash Flows (uneven number, happen more than one time) FVIF = Table A1 t = Current period n = Total of period i = Interest rate
Example: You expect to get inflow of RM10,000 in year

1, RM20,000 in year 2,3,4,5 (each year) and RM100 000 in year 6. Find the future value these cash flows. Interest is 10% annually.

EXERCISES
Now you are saving RM100 annually in year 1,2 and 3. Then at year 4 you are saving RM500 and RM300 at year 5. You are expected to receive dividend 8 percent annually. At the end of year 5, if you want to check your account, how much should your money could be?

You invest a single amount of RM10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?

You place RM25,000 in a saving account paying annual compound interest of 8% three years and then move it into a saving accounts that pays 10% interest compounded annually. How much will your money have grown at the end six years?

Saiful purchase a car for RM35,000 and pay RM5,000 down payment and agree to pay the rest over the next 10 years in 10 equal annual payments that include principal payments plus 13% compound interest on the unpaid balance. What will be the amount of each payment?

Your client is 35 years old and wants to begin saving for retirement. You advice the client to put RM5 000 a year into a stock market. You estimate that the markets return will be on average 10 percent a year. Assume the investment will be made at the end of the year.
If the client follows your advice, how much money will she

have by age 65? How much will she have by 50?

 You plan to purchase a condominium that is expected

to cost RM450 000 In 5 years time. You already have RM50 000 in Amanah Saham Bumiputra (ASB) that pays, and will continue to pay 14 percent interest for the next 5 years. You plan to add RM10 000 at the end of each year for 5 years starting one year from today. In year 5, you will use your saving in ASB as a down payment on your condominium. The balance will finance by a bank loan payable over 20 years at 10 percent annual interest rate. How much will you have to pay annually for the loan?

 You invest RM2 000 a year in a retirement account,

how much will you have:

In 5 years at 6 percent? In 20 years at 10 percent? In 40 years at 12 percent?

 How much you have to invest today to receive: RM15 000 in 8 years at 10 percent? RM20 000 in 12 year at 9 percent? RM6 000 each year for 10 years at 9 percent?