Appendix C - Time value of money. After reading the material in this chapter, you should be able to: Contrast simple and compound interest, calculate the future value and present value of a single amount, calculate the future value and present value of an annuity. | Time Value of Money Appendix C 1 Learning Objectives Contrast simple and compound interest Calculate the future value and present value of a single amount Calculate the future value and present value of an annuity App C-2 Time Value of Money Decrease in value of money due to passage of time Essential in solving many business decisions App C-3 Interest causes the value of money received today to be greater than the value of that same amount of money received in the future. Time value of money concepts are essential in solving many business decisions. These decisions include valuing assets and liabilities, making investment decisions, paying off debts, and establishing a retirement plan, to name just a few. Example: Assume that while at a local convenience store, you bought a lottery ticket and won $1,000. The ticket gives you the option of receiving (a) $1,000 today or (b) $1,000 one year from now. Which do you choose? Probably, all of us would choose $1,000 today. Choosing to take the money today instead of one year from now just makes common sense. It also makes good economic sense. You could take your $1,000 winnings today, put it in a savings account, earn interest on it for one year, and have an amount greater than $1,000 a year from now. So, $1,000 today is not equal to $1,000 a year from now. This simple example demonstrates the time value of money. 3 Learning Objective 1 Contrast simple and compound interest App C-4 Simple versus Compound Interest Simple interest: interest earned on the initial investment only Compound interest: interest earned on the initial investment and on previous interest App C-5 Interest is the cost of borrowing money. Simple interest is interest you earn on the initial investment only. Compound interest is interest you earn on the initial investment and on previous interest. Example: Suppose you put $1,000 into a savings account that pays simple interest of 10% and then withdraw the money at the end of three years. 5 Learning . | Time Value of Money Appendix C 1 Learning Objectives Contrast simple and compound interest Calculate the future value and present value of a single amount Calculate the future value and present value of an annuity App C-2 Time Value of Money Decrease in value of money due to passage of time Essential in solving many business decisions App C-3 Interest causes the value of money received today to be greater than the value of that same amount of money received in the future. Time value of money concepts are essential in solving many business decisions. These decisions include valuing assets and liabilities, making investment decisions, paying off debts, and establishing a retirement plan, to name just a few. Example: Assume that while at a local convenience store, you bought a lottery ticket and won $1,000. The ticket gives you the option of receiving (a) $1,000 today or (b) $1,000 one year from now. Which do you choose? Probably, all of us would choose $1,000 today. Choosing to take the
