USE BASIC MATHEMATICS OF FINANCE FOR BUSINESS ROUTINE

OPERATIONS
By the end of this section, each student should be able to:-

 Define present value and future value

 Compute the value of simple interest
 Compute the value of compound interest
 Compute the value of simple annuities (e.g Present and future)

Present Value (PV)

Present value is the current worth of a future sum of money or stream of cash flows given a
specified rate of return. PV calculations take into account the time value of money, which is the
idea that a dollar today is worth more than a dollar in the future because of its potential earning
capacity. This principle reflects the opportunity cost of not having the money available for
investment or consumption today.

The formula to calculate the present value of a single future sum is:

( )

Where:

PV = Present Value

FV = Future Value

r = interest rate (discount rate)

n = number of periods until payment or receipt

1. If you are to receive 7,500,000 Tanzanian shillings in three years and the annual discount
rate is 5%. Find the present value.

Future Value (FV)

Future value is the value of a current asset at a future date based on an assumed rate of growth or
interest. FV calculations show how much an investment made today will grow over time at a
given interest rate. This helps in understanding the potential value of an investment or savings at
a future point in time.

The formula to calculate the future value of a single present sum is:

( )

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 2. Calculate the future value; if you invest 1,000, 000 Tanzanian shillings today at an annual
interest rate of 5% for three years.
KEY DIFFERENCES
 Time Orientation: PV is concerned with the value today of a future amount,
whereas FV is concerned with the value in the future of an amount invested today.
 Usage: PV is commonly used in discounting future cash flows to determine their
worth today, which is essential in valuation, budgeting, and financial planning.
FV is used to project the growth of current investments or savings over time,
which is crucial for planning long-term financial goals.
Understanding these concepts is crucial for making informed financial decisions, such
as investments, loans, savings, and retirement planning.

Simple interest is calculated using a straightforward formula that does not take into
account the effects of compounding.
Compound interest is calculated using a formula that takes into account the effect of
compounding, where interest is earned on both the initial principal and the accumulated
interest from previous periods. The formula for compound interest is:
( )
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial amount of money)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the time the money is invested or borrowed for, in years
The compound interest 𝐼 earned can be found by subtracting the principal from the
future value :
I=A−P
3. Given the Principal amount ( ) of 15,000,000 Tsh, with the Annual interest rate ( ) of
5% compounded annually in three (3) years
(i) Calculate the Future Value (A)
(ii) Calculate the Compound Interest (I)

Different Compounding Periods

If the interest is compounded more frequently, such as semiannually, quarterly, or monthly, the
calculations adjust accordingly. For example, if the interest is compounded quarterly (n=4)

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Simple annuities are a series of equal payments made at regular intervals over a period of time.
There are two primary types of simple annuities:

(a) Ordinary annuities (payments made at the end of each period) and
(b) Annuities due (payments made at the beginning of each period).

Future Value of an Ordinary Annuity

The future value (FV) of an ordinary annuity can be calculated using the following formula:

( )

Where:

= future value of the annuity

= payment amount per period

= interest rate per period

= total number of payments

Present Value of an Ordinary Annuity

The present value (PV) of an ordinary annuity can be calculated using this formula:

( )

Where:

P = present value of the annuity

= payment amount per period

= interest rate per period

= total number of payments

4. You are set to receive $2,000 at the end of each year for the next 8 years. If the annual
interest rate is 4%, what is the present value of this annuity?
5. You plan to deposit $300 at the end of each month into a savings account that pays an
annual interest rate of 6%, compounded monthly, for 5 years. What will be the future
value of this annuity?

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Future Value of an Annuity Due

The future value (FV) of an annuity due can be calculated using the following formula:

( )
( )

Present Value of an Annuity Due

The present value (PV) of an annuity due can be calculated using this formula:

( )
( )

6. You will receive 50,000Tsh at the beginning of each quarter for the next 6 years. If the
quarterly interest rate is 2%, what is the present value of this annuity due?
7. You decide to invest 7,000,000Tsh at the beginning of each year for 10 years in an
account that earns an annual interest rate of 5%. What will be the future value of this
annuity due?

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