1. Appendix C- 1

2. Appendix C- 2 Appendix C Time Value of Money Accounting Principles, Ninth Edition

3. Appendix C- 3 1. 1.Distinguish between simple and compound interest. 2. 2.Identify the variables fundamental to solving present value problems. 3. 3.Solve for present value of a single amount. 4. 4.Solve for present value of an annuity. 5. 5.Compute the present value of notes and bonds. Study Objectives

4. Appendix C- 4 In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Basic Time Value Concepts Time Value of Money

5. Appendix C- 5 Payment for the use of money. Excess cash received or repaid over the amount borrowed (principal). Variables involved in financing transaction: 1. Principal (p) - Amount borrowed or invested. 2. Interest Rate (i) – An annual percentage. 3. Time (n) - The number of years or portion of a year that the principal is outstanding. Nature of Interest

6. Appendix C- 6 Interest computed on the principal only. SO 1 Distinguish between simple and compound interest. Nature of Interest ILLUSTRATION: On January 2, 2010, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the annual interest cost. Principal $20,000 Interest ratex 7% Annual interest$ 1,400 FULL YEAR Simple Interest

7. Appendix C- 7 Nature of Interest - Simple Interest ILLUSTRATION continued: On March 31, 2010, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the interest cost for the year ending December 31, 2010. Principal $20,000 Interest ratex 7% Annual interest$ 1,400 Partial year x 9/12 Interest for 9 months$ 1,050 PARTIAL YEAR SO 1 Distinguish between simple and compound interest.

8. Appendix C- 8 Nature of Interest SO 1 Distinguish between simple and compound interest. Computes interest on  the principal and  any interest earned that has not been paid or withdrawn. Most business situations use compound interest. Compound Interest

9. Appendix C- 9 ILLUSTRATION: On January 2, 2010, Tomalczyk borrows $20,000 for 3 years at a rate of 7% per year. Calculate the total interest cost for all three years, assuming interest is compounded annually. Nature of Interest - Compound Interest SO 1 Distinguish between simple and compound interest.

10. Appendix C- 10 SO 2 Identify the variables fundamental to solving present value problems. The present value is the value now of a given amount to be paid or received in the future, assuming compound interest. Present value variables: 1.Dollar amount to be received in the future, 2.Length of time until amount is received, and 3.Interest rate (the discount rate). Present Value Variables

11. Appendix C- 11 PV = FV / (1 + i ) n PV = present value of a single amount FV = future value of a single amount p = principal (or present value) i = interest rate for one period n = number of periods Present Value of a Single Amount SO 3 Solve for present value of a single amount. Illustration C-3 Formula for present value

12. Appendix C- 12 SO 3 Solve for present value of a single amount. Multiply the present value factor by the future value. Illustration: Exercise: Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? Present Value of a Single Amount

13. Appendix C- 13 Exercise: Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? 0123456 Present Value? What table do we use? Future Value $20,000 SO 3 Solve for present value of a single amount. Present Value of a Single Amount

14. Appendix C- 14 Table 1 What factor do we use? SO 3 Solve for present value of a single amount. Present Value of a Single Amount

15. Appendix C- 15 Table 1 $20,000 x.63552 = $12,710 Future ValueFactorPresent Value SO 3 Solve for present value of a single amount. Present Value of a Single Amount

16. Appendix C- 16 Exercise: Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment earns 12% compounded quarterly? 0123456 Present Value? What table do we use? Future Value $20,000 SO 3 Solve for present value of a single amount. Present Value of a Single Amount

17. Appendix C- 17 Table 1 What factor do we use? SO 3 Solve for present value of a single amount. Present Value of a Single Amount

18. Appendix C- 18 Table 1 $20,000 x.62317 = $12,463 Future ValueFactorPresent Value SO 3 Solve for present value of a single amount. Present Value of a Single Amount

19. Appendix C- 19 The value now of a series of future receipts or payments, discounted assuming compound interest. 01 Present Value 2341920 $100,000100,000..... 100,000 SO 4 Solve for present value of an annuity. Present Value of an Annuity

20. Appendix C- 20 Jaime Yuen wins $2,000,000 in the state lottery. She will be paid $100,000 at the end of each year for the next 20 years. What is the present value of her winnings? Assume an appropriate interest rate of 8%. 01 Present Value What table do we use? 2341920 $100,000100,000..... 100,000 SO 4 Solve for present value of an annuity. Present Value of an Annuity

21. Appendix C- 21 Table 2 What factor do we use? SO 4 Solve for present value of an annuity. Present Value of an Annuity

22. Appendix C- 22 Table 2 $100,000 x 9.81815 = $981,815 ReceiptFactorPresent Value SO 4 Solve for present value of an annuity. Present Value of an Annuity

23. Appendix C- 23 SO 5 Compute the present value of notes and bonds. Two Cash Flows: Periodic interest payments (annuity). Principal paid at maturity (single-sum). 01234910 70,000 $70,000..... 70,000 1,000,000 Present Value of a Long-term Note or Bond

24. Appendix C- 24 Exercise: Arcadian Inc. issues $1,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds is 8%. What amount will Arcadian receive when it issues the bonds? 01 Present Value 234910 70,000 $70,000..... 70,0001,070,000 SO 5 Compute the present value of notes and bonds. Present Value of a Long-term Note or Bond

25. Appendix C- 25 Table 2 $70,000 x 6.71008 = $469,706 Interest PaymentFactorPresent Value PV of Interest SO 5 Compute the present value of notes and bonds. Present Value of a Long-term Note or Bond

26. Appendix C- 26 Table 1 $1,000,000 x.46319 = $463,190 Principal PaymentFactorPresent Value PV of Principal SO 5 Compute the present value of notes and bonds. Present Value of a Long-term Note or Bond

27. Appendix C- 27 Exercise: Arcadian Inc. issues $1,000,000 of 7% bonds due in 10 years with interest payable at year-end. Present value of Interest $469,706 Present value of Principal 463,190 Bond current market value $932,896 SO 5 Compute the present value of notes and bonds. Present Value of a Long-term Note or Bond

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