Appendices D - Time value of money. After studying this chapter, you should be able to: Distinguish between simple and compound interest, solve for future value of a single amount, solve for future value of an annuity, identify the variables fundamental to solving present value problems, solve for present value of a single amount,. | D TIME VALUE OF MONEY Accounting, Fifth Edition After studying this chapter, you should be able to: Distinguish between simple and compound interest. Solve for future value of a single amount. Solve for future value of an annuity. Identify the variables fundamental to solving present value problems. Solve for present value of a single amount. Solve for present value of an annuity. Compute the present value of notes and bonds. Use a financial calculator to solve time value of money problems. Learning Objectives Would you rather receive $1,000 today or in a year from now? Basic Time Value Concepts Time Value of Money Today! “Interest Factor” Payment for the use of money. Excess cash received or repaid over the amount borrowed (principal). Variables involved in financing transaction: Principal (p) - Amount borrowed or invested. Interest Rate (i) – An annual percentage. Time (n) - The number of years or portion of a year that the principal is borrowed or invested. Nature of Interest LO 1 Distinguish between simple and compound interest. Interest computed on the principal only. LO 1 Distinguish between simple and compound interest. Nature of Interest Illustration: Assume you borrow $5,000 for 2 years at a simple interest of 12% annually. Calculate the annual interest cost. Interest = p x i x n = $5,000 x .12 x 2 = $1,200 FULL YEAR Illustration D-1 Simple Interest Computes interest on the principal and any interest earned that has not been paid or withdrawn.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 LO 1 Distinguish between simple and compound interest. Compound Interest 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 LO | D TIME VALUE OF MONEY Accounting, Fifth Edition After studying this chapter, you should be able to: Distinguish between simple and compound interest. Solve for future value of a single amount. Solve for future value of an annuity. Identify the variables fundamental to solving present value problems. Solve for present value of a single amount. Solve for present value of an annuity. Compute the present value of notes and bonds. Use a financial calculator to solve time value of money problems. Learning Objectives Would you rather receive $1,000 today or in a year from now? Basic Time Value Concepts Time Value of Money Today! “Interest Factor” Payment for the use of money. Excess cash received or repaid over the amount borrowed (principal). Variables involved in financing transaction: Principal (p) - Amount borrowed or invested. Interest Rate (i) – An annual percentage. Time (n) - The number of years or portion of a year that the principal is borrowed or invested. Nature of Interest LO 1
