Lecture Financial and managerial accounting (2nd Edition): Appendix G - Weygandt, Kimmel, Kieso

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Lecture Financial and managerial accounting (2nd Edition): Appendix G - Weygandt, Kimmel, Kieso. Appendix G - Time value of money. This chapter’s objectives are to: 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.
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Lecture Financial and managerial accounting (2nd Edition): Appendix G - Weygandt, Kimmel, Kieso. Appendix G - Time value of money. This chapter’s objectives are to: 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..

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G-1 Appendix G Time Value of Money Learning Objectives 1 2 3 4 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. G-2 LEARNING OBJECTIVE 1 Compute interest and future values. Time Value of Money Would you rather receive $1,000 today or in a year from now? Today! “Interest Factor” G-3 Nature of Interest Payment for the use of money. Difference between amount borrowed or invested (principal) and amount repaid or collected. Elements involved in financing transaction: 1. Principal (p): Amount borrowed or invested. 2. Interest Rate (i): An annual percentage. 3. Time (n): Number of years or portion of a year that the principal is borrowed or invested. G-4 LO 1 Nature of Interest SIMPLE INTEREST Interest computed on the principal only. Illustration: Assume you borrow $5,000 for 2 years at a simple interest rate of 12% annually. Calculate the annual interest cost. Illustration G­1 Interest computations 2 FULL YEARS Interest = p x i x n = $5,000 x .12 x 2 = $1,200 G-5 LO 1 Nature of Interest COMPOUND INTEREST Computes interest on ► the principal and ► any interest earned that has not been paid or withdrawn. Most business situations use compound interest. G-6 LO 1 Nature of 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. Illustration G­2 Simple versus compound interest Year 1 $1,000.00 x 9% Year 2 $1,090.00 x 9% Year 3 $1,188.10 x 9% $ 90.00 $ 98.10 $106.93 $ 1,090.00 $ 1,188.10 $ 1,295.03 G-7 LO 1 Future Value Concepts Future Value of a Single Amount Future value of a single amount is the value at a future date of a given amount invested, assuming compound interest. Illustration G­3 Formula for future value FV = future value of a single amount p = principal (or present value; the value today) i = interest rate for one period n = number of periods G-8 LO 1 Future Value of a Single Amount Illustration: If you want a 9% rate of return, you would compute the future value of a $1,000 investment for three years as follows: Illustration G­4 Time diagram G-9 LO 1 Future Value of a Single Amount Alternate Method Illustration: If you want a 9% rate of return, you would compute the future value of a $1,000 investment for three years as follows: Illustration G­4 Time diagram

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