Appendix G -Time value of money. The following will be discussed in this chapter: Compute interest and future values, compute present values, compute the present value in capital budgeting situations, use a financial calculator to solve time value of money problems. | Accounting in Action Learning Objectives After studying this chapter, you should be able to: [1] Distinguish between simple and compound interest. [2] Solve for future value of a single amount. [3] Solve for future value of an annuity. [4] Identify the variables fundamental to solving present value problems. [5] Solve for present value of a single amount. [6] Solve for present value of an annuity. [7] Compute the present value of notes and bonds. [8] Compute the present values in capital budgeting situations. [9] Use a financial calculator to solve time value of money problems. AppendixG Time Value of Money 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. 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. Nature of Interest LO 1 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computations Simple Interest LO 1 Computes interest on the principal and any interest earned that has not been paid or withdrawn.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 . | Accounting in Action Learning Objectives After studying this chapter, you should be able to: [1] Distinguish between simple and compound interest. [2] Solve for future value of a single amount. [3] Solve for future value of an annuity. [4] Identify the variables fundamental to solving present value problems. [5] Solve for present value of a single amount. [6] Solve for present value of an annuity. [7] Compute the present value of notes and bonds. [8] Compute the present values in capital budgeting situations. [9] Use a financial calculator to solve time value of money problems. AppendixG Time Value of Money 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. 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. .
