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Compounding and Discounting

This module covers the concepts of compounding and discounting, including their formulas and applications. Participants will learn to compute future and present values using given interest rates and time periods. Exercises are provided to reinforce understanding of these financial principles.

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18 views13 pages

Compounding and Discounting

This module covers the concepts of compounding and discounting, including their formulas and applications. Participants will learn to compute future and present values using given interest rates and time periods. Exercises are provided to reinforce understanding of these financial principles.

Uploaded by

downman95
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE 07

COMPOUNDING AND DISCOUNTING


In this module, the research persons will discuss compounding and discounting. As well as how to solve for them.

Session Objectives:

At the end of the session, the training participants must be able to:

1. C o m p u t e c o m p o u n d i n g a n d d i s c o u n t i n g .
PRESENTATIONS

De partment o f Sci enc e and Te chnology (DOST)


Ph il ippine Cou nc il f or A g ric ult u re , A q ua t i c, a nd N at u ra l Res o u rces Res ea rch a n d Dev el o pm en t ( P CAARRD)
Compounding and Discounting

Marilyn M. Elauria
CEM, UP
Compounding

Uses the following formula:

FV = PV (1 + r) n
where:
FV = future value
PV = present value
r = interest rate
n = number of years or time period
Compounding-Application

If you deposit P10,000 in a bank that pays you 15% interest compounded annually,
how much would you have at the end of (a) one year, (b) 5 years?

Solution:
(a) FV = (1.15)1 (10,000)
= 11,500

(b) FV = (1.15)5 (10,000)


= 2.011 (10,000)

0r 10,000 x CF 15%,5yrs
Discounting
• Reciprocal of compounding
• We calculate what a known future amount is worth to us today
• Multiplication factor for discounting is called the discount factor
• Formula:
1
PV = FV x ——————
(1 + r )n

where:
FV= future worth
PV= present worth
r = rate of interest
n = number of years
Discounting -Application
• At the end of 5 years, you will need P100,000 to start a project. How much must
you deposit in the bank now, which pays 15% yearly interest rate, to ensure that at
the end of 5 years you will have enough capital to start the project?

Solution:
1
The discount factor = ------------ = 0.497
(1 + .15 ) 5

PV = (100,000) (0.497)
= P49,700
DISCOUNTING-EXERCISE

1. How much would you need to invest now, to get $10,000 in 10 years at 8% interest
rate?
2. Let us suppose you are 40 years old and wish to retire at age 65. How much should
you deposit at a 10 % i.r. to make you a millionaire?
3. Which would you prefer: P100,000 today or P120,000 a year from now?
COMPARING PRESENT WORTH

The technique of discounting nds very wide application in the investment analysis as
it brings to the present the value of costs and bene ts that are occurring in different
periods.

Example: Projects A and B have same cost stream but with varying gross bene ts.

Project A Project B
Year
Gross Bene ts (P)
1 1,000 800
2 900 800
3 800 800
4 700 800
5 600 800
Total (undiscounted) 4,000 4,000
fi
fi
fi
fi
MODULE 07

COMPOUNDING AND DISCOUNTING

De partment o f Sci enc e and Te chnology (DOST)


Ph il ippine Cou nc il f or A g ric ult u re , A q ua t i c, a nd N at u ra l Res o u rces Res ea rch a n d Dev el o pm en t ( P CAARRD)

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