Chapter 6 - Time value of money concepts. Time value of money concepts, specifically future value and present value, are essential in a variety of accounting situations. These concepts and the related computational procedures are the subjects of this chapter. | Time Value of Money Concepts 6 Chapter 6: Time Value of Money Concepts Time Value of Money Interest is the rent paid for the use of money over time. That’s right! A dollar today is more valuable than a dollar to be received in one year. The time value of money means that money can be invested today to earn interest and grow to a larger dollar amount in the future. Time value of money concepts are useful in valuing several assets and liabilities. Interest is the amount of money paid or received in excess of the amount borrowed or lent. Learning Objectives Explain the difference between simple and compound interest. LO1 Our first learning objective in Chapter 6 is to explain the difference between simple and compound interest. Simple Interest Interest amount = P × i × n Assume you invest $1,000 at 6% simple interest for 3 years. You would earn $180 interest. ($1,000 × .06 × 3 = $180) (or $60 each year for 3 years) Simple interest is computed by multiplying an initial investment times both the applicable interest rate and the period of time for which the money is borrowed or lent. Assume you invest $1,000 at 6% simple interest for 3 years. You would earn $180 interest. Compound Interest Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods. Principal Interest Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods. Assume we will save $1,000 for three years and earn 6% interest compounded annually. What is the balance in our account at the end of three years? Compound Interest Assume we will save $1,000 for three years and earn 6% interest compounded annually. What is the balance in our account at the end of three years? Compound Interest Each year we earn interest on the initial investment amount plus any previously earned interest. As a result, at the end of the three years, we have a total of $1,. Learning . | Time Value of Money Concepts 6 Chapter 6: Time Value of Money Concepts Time Value of Money Interest is the rent paid for the use of money over time. That’s right! A dollar today is more valuable than a dollar to be received in one year. The time value of money means that money can be invested today to earn interest and grow to a larger dollar amount in the future. Time value of money concepts are useful in valuing several assets and liabilities. Interest is the amount of money paid or received in excess of the amount borrowed or lent. Learning Objectives Explain the difference between simple and compound interest. LO1 Our first learning objective in Chapter 6 is to explain the difference between simple and compound interest. Simple Interest Interest amount = P × i × n Assume you invest $1,000 at 6% simple interest for 3 years. You would earn $180 interest. ($1,000 × .06 × 3 = $180) (or $60 each year for 3 years) Simple interest is computed by multiplying an initial investment times .
