Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Spiceland | Thomas | Herrmann Financial Accounting Time Value of Money Appendix C

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Time Value of Money Decrease in value of money due to passage of time Essential in solving many business decisions App C-3

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Contrast simple and compound interest App C-4

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.1—Calculation of Simple Interest App C-6

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.2—Calculation of Compound Interest App C-7

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Calculate the future value and present value of a single amount App C-8

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.3—Future Value of a Single Amount FV = future value of the invested amount, I = initial investment, i = interest rate, n = number of compounding periods FV = I (1 + i) n App C-9

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.4—Future Value of $1 (excerpt from Table 1) App C-10

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Calculate the Future Value of a Single Amount Using a Financial Calculator and Excel App C-11

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.7—Present Value of a Single Amount PV = (1 + i) n FV App C-12

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.8—Present Value of $1 (excerpt from Table 2) App C-13

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Calculate the future value and present value of an annuity App C-14

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Time Value of an Annuity For a series of receipts and payments of cash Annuity: Cash payments of equal amounts over equal time intervals App C-15

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.11—Future Value of an Annuity App C-16

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.12—Future Value of an Annuity of $1 (excerpt from Table 3) App C-17

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Time Value of an Annuity— Present Value Useful in cases where certain liabilities require periodic interest payments Helps determine the liability to be reported today App C-18

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.15—Present Value of an Annuity App C-19

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Illustration C.16—Present Value of an Annuity of $1 (excerpt from Table 4) App C-20

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter Appendix C App C-21