In order to be smart and calculative in personal finance matters, understanding the time value of money is an essential part of the learning process.

Starting today, I will be posting a series of computation method related to time value of money on every Wednesday. Now, we will start with learning the calculation of the value of single sum investment.

Common Problems

  • You have RM10,000 in a fixed deposit account, giving 3.7% return annually. If you don’t cash out the interest earned, how much if the total money accumulated after 15 years?
  • Ali borrowed RM5,000 from a loan shark 5 months ago. He agreed to pay compounded interest of 3% per month, calculated based on total amount owed. But Ali never made any payment until now. How much should the loan shark claim from Ali?

Theory

Before I learn the theory of time value of money (TVM), I used to create spreadsheet using Microsoft Excel to automate the repetitive calculations. Now, save yourself the trouble. Use this formula:

  FV   \ = \  PV \cdot (1+i)^n

FV (Future value) = future value of investment at the end of period
PV (Present value) = present sum of money set aside for the investment
i = rate of interest
n = number of periods

Solutions

Example 1:
You have RM10,000 in a fixed deposit account, giving 3.7% return annually. If you don’t cash out the interest earned, how much if the total money accumulated after 15 years?

PV = RM10,000
i = 3.7% per annum
n = 15 years
FV= ?

Using scientific calculator, substitute the values into the formula
FV = RM17245.72

The easier way is to use a financial calculator. Try this online future value calculator.

Example 2:
Ali borrowed RM5,000 from a loan shark 5 months ago. He agreed to pay
compounded interest of 3% per month, calculated based on total amount
owed. But Ali never made any payment until now. How much should the
loan shark claim from Ali?

PV = RM5,000
i = 3% per month
n = 5 months
FV= ?

Substitute the values into the formula, you will get
FV = RM5796.37

You should never mess with a loan shark.

Exercise

1. A unit trust agent told you that Fund A give a return of 10% per annum. If you invest RM50,000 now, how much would you expect the total fund value of your investment after 8 years?

2. The current inflation rate is about 3.5% per annum. Now you pay RM10.80 for a cup of Starbucks coffee. How much would it costs when you retire after 23 years?

3. Let’s assume the US dollar is depreciating at a constant rate of 1% per month. Now, USD1 equals to RM3.34. After 8 months, how much US dollar can you get from RM5.00?

Post your answer in the comment section. The first commenter who got the all right answers will get a special 3D birthday card sponsored by Pigeon Card.


KCLau
KCLau

Personal finance author and trainer

    12 replies to "Time Value of Money: Computing the Value of Single Sum Investment"

    • […] How to calculate the value of single sum investment {Time Value of Money Tutorial} Finding the Rate of Return to Meet Financial Goals {Time Value of Money Tutorial} Computing the Value of a Fixed Sum Invested Regularly {Time Value of Money Tutorial} How to Calculate the total money in EPF Account […]

    • peter

      sorry the calculation listed should be

      PV = RM5,000
      i = 3% per month
      n = 5 months
      FV = 5000x(1+0.03)power 5 = RM5796.37

    • peter

      let say if we switch the case study

      You have RM5,000 in a fixed deposit account, giving 3 return annually. If you don’t cash out the interest earned, how much if the total money accumulated after 5 month?

      PV = RM5,000
      i = 3% per month
      n = 5 months
      FV = 10000x(1+0.03)power 5 = RM5796.37

      something missing and not sure what’s wrong with the calculation, anyone can help?

      any different when calculating when one is compounded annually and one is monthly?

    • Jaiyah M. Jalarue

      Your site seems to be a teaching one. I do need help in finance. What do I need to do? Kindly let me know what is required.

    • Jaiyah M. Jalarue

      I am a student in Finance and now struggling. How do I get help? Kindly give some details of all requirement(s). Many thanks!!!

    • ctmimm

      1USD = RM3.34
      Found out how much RM3.34 depreciates across 8 months.
      Then divide the value with RM5 to find how much USD you can have.

      5/[3.34*(1-0.01)^8] = $1.38

    • Carol

      I get the answer for Q1 and 2. But my answer for Q3 is US$1.89. That mean my answer is wrong. So can you show me the method or culcalation to get the answer US$1.62?
      Thanks.

    • […] How to calculate the value of single sum investment {Time Value of Money Tutorial} Finding the Rate of Return to Meet Financial Goals {Time Value of Money Tutorial} […]

    • Fatduck
    • […] Previous Tutorial on Time Value of Money How to calculate the value of single sum investment {Time Value of Money Tutorial} […]

    • Fatduck

      Helo there.. I just want to mention to u that the i = 3.7% per annum in example 1 that u have given is misleading. i punch all the value in the calculator and cant seem to find the answer. the actual value to be punch for I= o.o37 . THis is to those who didnt know.
      Fv= 10000x(1+0.037)power 15=RM17245.72

      Ans
      1.107179.44
      2. 23.83
      3. US1.38

      • KCLau

        Hi Fatduck

        You are the first and only person who do the exercise.
        You’ve got the right answer for no.1 and 2.

        The correct answer for No. 3 is US$1.62

        Think logically, if US dollar depreciates, you will get more US dollars from the lower exchange rate.

        However, since you are the only respond I got, please provide your mailing address and I will post the prize to you. (use the contact form if you don’t have my email)

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