tailieunhanh - 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. | Learning Objectives Compute interest and future values. 1 Compute present values 2 Compute the present value in capital budgeting situations. 3 Use a financial calculator to solve time value of money problems. 4 Appendix G Time Value of Money LEARNING OBJECTIVE Compute interest and future values. 1 Would you rather receive $1,000 today or in a year from now? 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computations SIMPLE INTEREST LO 1 Computes interest on the principal and any interest earned that has not been paid or withdrawn.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 $1, x 9% $ $ 1, Year 2 $1, x 9% $ $ 1, Year 3 $1, x 9% $ $ 1, Illustration G-2 Simple versus compound interest LO 1 Future value of a single amount is the value at a future date of a given amount invested, assuming compound interest. Future Value Concepts FV = future value of a single . | Learning Objectives Compute interest and future values. 1 Compute present values 2 Compute the present value in capital budgeting situations. 3 Use a financial calculator to solve time value of money problems. 4 Appendix G Time Value of Money LEARNING OBJECTIVE Compute interest and future values. 1 Would you rather receive $1,000 today or in a year from now? 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