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Time Value Analysis

Time value analysis involves discounting and compounding cash flows to determine their present and future values. It includes: 1) Discounting future cash flows to calculate their present value using a discount rate. This is used to analyze investments. 2) Compounding present cash flows to determine their future value after a period of time. This helps evaluate returns on investments. 3) Calculating future and present values of single amounts and annuities (series of cash flows), where present value factors are used to discount annuity cash flows and future value factors compound single amounts.

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Jesah Christa Montaño
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718 views5 pages

Time Value Analysis

Time value analysis involves discounting and compounding cash flows to determine their present and future values. It includes: 1) Discounting future cash flows to calculate their present value using a discount rate. This is used to analyze investments. 2) Compounding present cash flows to determine their future value after a period of time. This helps evaluate returns on investments. 3) Calculating future and present values of single amounts and annuities (series of cash flows), where present value factors are used to discount annuity cash flows and future value factors compound single amounts.

Uploaded by

Jesah Christa Montaño
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TIME VALUE ANALYSIS

TIME VALUE OF MONEY ANALYSIS (TVMA)


 Also called Discounted Cash Flow Analysis (DCFA)
 Expertise on this will help the financial management to realize its goal – maximize the
value of the firm’s share

DISCOUNTING – finding the PRESENT VALUE of a Future Value

COMPOUNDING – finding the FUTURE VALUE of a Present Value

FUTURE VALUE PRESENT VALUE


FACTOR FACTOR
BASE Future Value Present Value
LOOKING FOR Present Value Future Value
Essential in computing the The PVF of PhP1.0 is used
FV of an amount that is to compute the present
paid/received ONLY value of an amount that is
ONCE in the present received or paid ONLY
ONCE in the future

(1)FUTURE VALUE with a SINGLE AMOUNT or FUTURE VALUE of PhP 1.00

EXAMPLE:

Assume that on January 1, 2020, Dondon invested P100,000 in a financing company. Dondon
would like to find out what would be the worth of his P100,000 after 5 years with an interest
rate of 8% .

PERIOD AMOUNT INVESTED FUTURE VALUE


December 31, 2020 P 100,000 X 1.08 P 108,000
December 31, 2021 P 108,000 X 1.08 116,640
December 31, 2022 P 116,640 X 1.08 125,971
December 31, 2023 P 125,971 X 1.08 136, 049
December 31, 2024 P 136,049 X 1.08 146,933

**Use p. 189 (Future Value Interest Factor of PhP1 per period at i% for n periods, FVIF 9i,n)
Fundamentals of Financial Management by Anastacio, Dacanay & Aliling 1
TIME VALUE ANALYSIS
= P100,000 X 1.469
= P146,900

(2) FUTURE VALUE with SEVERAL AMOUNTS (Ordinary Annuity)

EXAMPLE:

Assume that Enzo Co. is to make annual investment of PhP200,000 for four years. The
interest for this investment was pegged at 9% The investment is made every end of the year.
What is the future value of this annuity?

PERIOD AMOUNT FV FACTOR OF FUTURE VALUE


INVESTED PhP1
Dec. 31 – 4th Year 200,000 1.00 PhP 200,000
Dec. 31 – 3rd Year 200,000 1.09 218,000
Dec. 31 – 2nd Year 200,000 1.881 237,620
Dec. 31 – Ist Year 200,000 1.2950 259,000
FV Annuity Factor 4.5731
Future Value PHP 914,620
Annuity

**Use p. 189 (Future Value Interest Factor of PhP1 per period at i% for n periods, FVIF 9i,n)

(3) FUTURE VALUE with SEVERAL AMOUNTS (Annuity Due)

EXAMPLE:

Assume that Enzo Co. is to make annual investment of PhP200,000 for four years. The
interest for this investment was pegged at 9% The investment is made every beginning of the
year. What is the future value of this annuity?

PERIOD AMOUNT FV FACTOR OF FUTURE VALUE


INVESTED PhP1
Fundamentals of Financial Management by Anastacio, Dacanay & Aliling 2
TIME VALUE ANALYSIS
January 1 – 4th Year 200,000 1.09 PhP 218,000
January 1 – 3rd Year 200,000 1.881 237,620
January 1 – 2nd Year 200,000 1.2950 259,000
January 1 – Ist Year 200,000 1.4116 282,320
FV Annuity Factor 4.9847
Future Value Annuity PHP 996,940

NOTE:
 ANNUITY DUE- Future Value is much higher that the Future Value of Ordinary Annuity
due to the investment is done at an earlier date (beginning of the year)

(4) PRESENT VALUE with a SINGLE AMOUNT or PRESENT VALUE OF


PhP1.0

EXAMPLE

Assume that Tria Corporation would like to know the amount of investment it will make in order
to yield an amount of PhP100,000 which it will receive 3 years from now. Assume that the
discount rate for this type of investment is 25%.

Try to determine the future value of PhP1.00 in 3 years.

PERIOD COMPUTATION FV OF PhP1.00


st
After 1 Year PhP 1.00 x 1.25 PhP 1.25
After 2nd Year 1.25 x 1.25 1.5625
After 3rd Year 1.5625 x 1.25 1.9531

 PVF (Present Value Factor) = Present Value/ Future Value


 = PhP1.00/PhP1.9531
 = 0.512

 To Compute for the PV (Present Value) of a single amount or PhP1.0:

 PV of an amount = (Amount to be received or paid) X (PVF)

 PV of PhP100,000 = (PhP100,000) (0.512)


Fundamentals of Financial Management by Anastacio, Dacanay & Aliling 3
TIME VALUE ANALYSIS
= PhP 51,200

 PhP 51,200 - is the present value of PhP100,000 (the amount to


be received in the future)
- amount that Tria Corporation needs to invest in
order to yield PhP 100,000 return 3 years from
now

(5) PRESENT VALUE with SEVERAL AMOUNTS (Ordinary Annuity)

EXAMPLE:

Assume that on January 1 of the current year, Keith Corporation sold its equipment costing
PhP500,000 for PhP800,000 to Arvin Corporation. Arvin Paid PhP200,000 as down payment
and the balance was paid with a non-interest bearing note for PhP600,000. The note shall be
paid in equal annual installments every year end amounting to PhP200,000/year. The
prevailing interest rate for this type of note is 10%. You have been tasked by Keith Corporation
on the PV (Present Value) of the note receivable to be recognized by the company).

PERIOD SERIES OF FVs PV Factor of PV of PhP1.00 for


To be received by PhP1.00 @ 10% each amount
Keith
Year End – 1st Year PhP 200,000 0.9091 PhP 181,820
Year End – 2nd Year 200,000 0.8264 165,280
Year End – 3rd Year 200,000 0.7513 150,260
PV of Ordinary
Annuity Factor 2.4869**
PV Ordinary Annuity PhP 497,360

**NOTA BENE (NOTE well)


- The PV of Ordinary Annuity Factor is the sum of the PV of PhP 1.00 in the series of
amounts received

(6) PRESENT VALUE of SEVERAL AMOUNTS (Annuity Due)

EXAMPLE:

Fundamentals of Financial Management by Anastacio, Dacanay & Aliling 4


TIME VALUE ANALYSIS
Assume that on January 1 of the current year, Keith Corporation sold its equipment costing
PhP500,000 for PhP800,000 to Arvin Corporation. Arvin Paid PhP200,000 as down payment
and the balance was paid with a non-interest bearing note for PhP600,000. The note shall be
paid in equal annual installments at the beginning of each year amounting to
PhP200,000/year. The prevailing interest rate for this type of note is 10%. You have been
tasked by Keith Corporation on the PV (Present Value) of the note receivable to be recognized
by the company).

PERIOD SERIES OF FVs PV Factor of PV of PhP1.00 for


To be received by PhP1.00 @ 10% each amount
Keith
Beginning – 1st Year PhP 200,000 1.0000 PhP 200,000
Beginning – 2nd Year 200,000 0.9091 181,820
Beginning– 3rd Year 200,000 0.8264 165,280
PV of Ordinary Annuity 150,260
Factor 2.7355
PV Ordinary Annuity PhP 547,100

Fundamentals of Financial Management by Anastacio, Dacanay & Aliling 5

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