Lecture Financial accounting: Tools for business decision making - Chapter App G: Time value of money. This chapter’s objectives are to: Compute interest and future values, compute present values, use a financial calculator to solve time value of money problems. | Time Value of Money Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition G CHAPTER OUTLINE Compute interest and future values. 1 Compute present values. 2 LEARNING OBJECTIVES Use a financial calculator to solve time value of money problems. 3 Payment for the use of money. Difference between amount borrowed or invested (principal) and amount repaid or collected. Elements involved in financing transaction: Principal (p): Amount borrowed or invested. Interest Rate (i): An annual percentage. Time (n): Number of years or portion of a year that the principal is borrowed or invested. LO 1 LEARNING OBJECTIVE Compute interest and future values. 1 NATURE OF INTEREST Interest computed on the principal only. NATURE OF INTEREST Illustration: Assume you borrow $5,000 for 2 years at a simple interest rate of 12% annually. Calculate the annual interest cost. Interest = p x i x n = $5,000 x .12 x 2 = $1,200 2 FULL YEARS ILLUSTRATION G-1 Interest computations Simple Interest LO 1 Computes . | Time Value of Money Kimmel ● Weygandt ● Kieso Financial Accounting, Eighth Edition G CHAPTER OUTLINE Compute interest and future values. 1 Compute present values. 2 LEARNING OBJECTIVES Use a financial calculator to solve time value of money problems. 3 Payment for the use of money. Difference between amount borrowed or invested (principal) and amount repaid or collected. Elements involved in financing transaction: Principal (p): Amount borrowed or invested. Interest Rate (i): An annual percentage. Time (n): Number of years or portion of a year that the principal is borrowed or invested. LO 1 LEARNING OBJECTIVE Compute interest and future values. 1 NATURE OF INTEREST Interest computed on the principal only. NATURE OF INTEREST Illustration: Assume you borrow $5,000 for 2 years at a simple interest rate of 12% annually. Calculate the annual interest cost. Interest = p x i x n = $5,000 x .12 x 2 = $1,200 2 FULL YEARS ILLUSTRATION G-1 Interest computations Simple Interest LO 1 Computes interest on the principal and any interest earned that has not been paid or withdrawn. Most business situations use compound interest. NATURE OF INTEREST Compound Interest LO 1 Illustration: Assume that you deposit $1,000 in Bank Two, where it will earn simple interest of 9% per year, and you deposit another $1,000 in Citizens Bank, where it will earn compound interest of 9% per year compounded annually. Also assume that in both cases you will not withdraw any interest until three years from the date of deposit. Nature of Interest - Compound Interest Year 1 $1, x 9% $ $ 1, Year 2 $1, x 9% $ $ 1, Year 3 $1, x 9% $ $ 1, ILLUSTRATION G-2 Simple versus compound interest LO 1 Future value of a single amount is the value at a future date of a given amount invested, assuming compound interest. FUTURE VALUE OF A SINGLE AMOUNT FV = future value of a single amount p = principal (or present value; the value today) i = interest rate for one period
