AC300.01: Unit 8 Seminar January 4, 2012 School of Business and Management

Agenda Welcome Seminar Rules Time Value of Money Case CM- 1, p. M34 Questions

Seminar Rules by Greg Rose 1.If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one! 2.When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue. 3.Please do NOT start side conversations. 4.Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good! 5.Don`t worry about typos. Be clear as you can and refrain from smileys and slang – use proper English. Assignments Grading Late Policy Seminar procedures and Polling Questions

Case CM- 1 Cost of Insurance Plans The Johnson Company is considering three different time periods for an insurance policy on its main office building. The premiums on a fire insurance policy covering the building for the amount of $2,000,000 on a one-year, three-year, and five-year basis are as follows: One year $ 4,480 Three years 11,200 Five years 17,920

Case CM- 1 Cost of Insurance Plans In each case, the entire premium for the full term of the policy is payable at the beginning of the year in which the policy is purchased. Required: Evaluate the annual cost of each insurance plan for the insured, assuming that money is worth 12% compounded annually. Which plan do you recommend? State the savings for the company.

Case CM- 1 Cost of Insurance Plans What is the cost of the 1-year plan?

Case CM- 1 Cost of Insurance Plans Annual cost of the 1-year plan: $4,480.00

Case CM- 1 Cost of Insurance Plans What is the cost of the 3-year plan?

Case CM- 1 Cost of Insurance Plans This is an annuity due problem. Using the present value of an annuity due table, we select the factor for 3 years at 12% ( ). The cost of $11,200 is divided by equals $4, Annual cost of the 3-year plan: $4,163.49

Case CM- 1 Cost of Insurance Plans What is the cost of the 5-year plan?

Case CM- 1 Cost of Insurance Plans This is an annuity due problem. Using the present value of an annuity due table, we select the factor for 5 years at 12% ( ). The cost of $17,920 is divided by equals $4, Annual cost of the 5-year plan: $4,438.56

Case CM- 1 Cost of Insurance Plans The 3-year plan is the least expensive plan given the 12% rate. The savings over the other two plans are computed as follows: Yearly savings over the 1-year plan $4, $4, = $ Yearly savings over the 5-year plan $4, $4, = $275.07

Compound Interest Compound interest is the process of computing interest on the principal plus any interest previously earned.

Use Periods The term period is used in place of years because interest may be compounded daily, weekly, monthly, and so on. Therefore, to convert the annual interest rate to the compounding period interest rate, divide the annual interest rate by the number of compounding periods in a year.

Number of Periods The number of periods over which interest will be compounded is calculated by multiplying the number of years involved by the number of compounding periods in a year.

Five types of compound interest tables The following is a summary of the contents of the five types of compound interest tables: “Future value of 1” table. Contains the amounts to which 1 will accumulate if deposited now at a specified rate and left for a specified number of periods.

Five types of compound interest tables “Present value of 1” table. Contains the amounts that must be deposited now at a specified rate of interest to equal 1 at the end of a specified number of periods. “Future value of an ordinary annuity of 1” table. Contains the amounts to which periodic rents of 1 will accumulate if the payments (rents) are invested at the end of each period at a specified rate of interest for a specified number of periods. (This table may also be used as a basis for converting to the amount of an annuity due of 1.)

Five types of compound interest tables “Present value of an ordinary annuity of 1” table. Contains the amounts that must be deposited now at a specified rate of interest to permit withdrawals of 1 at the end of regular periodic intervals for the specified number of periods. “Present value of an annuity due of 1” table. Contains the amounts that must be deposited now at a specified rate of interest to permit withdrawals of 1 at the beginning of regular periodic intervals for the specified number of periods.

Questions Thank you for attending this seminar.