Appendix B – Time Value of Money
APPENDIX B
TIME VALUE OF MONEY
Related Assignment Materials
Student Learning Objectives Quick Studies* Exercises*
Conceptual objectives:
C1. Describe the earning of interest
and the concepts of present and
future values.
B-1 B-11, B-19
Procedural objectives:
P1. Apply present value concepts
to a single amount by using
interest tables.
B-2, B-3, B-4 B-1, B-2, B-12, B-13, B-18, B-19
P2. Apply future value concepts to
a single amount by using
interest tables.
B-5 B-3, B-4, B-5, B-6, B-17, B-18, B-19
P3. Apply present value concepts
to an annuity by using interest
tables.
B-6 B-7, B-8, B-9, B-10, B-11, B-12, B-13,
B-18, B-19
P4. Apply future value concepts to
an annuity by using interest
tables.
B-7 B-14, B-15, B-16, B-17, B-18, B-19
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode
B-1
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Education.
Appendix B – Time Value of Money
Appendix Outline
I. Present Value and Future Value Concepts
A. As time passes, certain assets and liabilities that are held grow.
B. Growth is due to interest.
C. Present and future value computations are a way for us to measure
or estimate the interest component of holding assets or liabilities
over time.
II. Present Value of a Single Amount
A. The present value of a single amount received at a future date is
the amount that can be invested now at the specified interest rate
to yield that future value.
B. A table of present values for a single amount shows the present
values of $1 for a variety of interest rates and a variety of time
periods that will pass before the $1 is received.
III. Future Value of a Single Amount
A. The future value of a single amount invested at a specified rate of
interest is the amount that would accumulate by the future date.
B. A table of future values of a single amount shows the future values
of $1 invested now at a variety of interest rates for a variety of
time periods.
IV. Present Value of an Annuity
A. An ordinary annuity is defined as equal end-of-period payments at
equal intervals.
B. The present value of an annuity is the amount that can be invested
now at the specified interest rate to yield that series of equal
periodic payments.
C. A table of present values for an annuity shows the present values
of annuities where the amount of each payment is $1 for different
numbers of periods and a variety of interest rates.
V. Future Value of an Annuity
A. The future value of an annuity invested at a specified rate of
interest is the amount that would accumulate by the date of the
final payment.
B. A table of future values for an annuity shows the future values of
annuities where the amount of each payment is $1 for different
numbers of periods and a variety of interest rates.
Notes
B-2
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Education.
Appendix B – Time Value of Money
Alternate Demonstration Problem
Appendix B
Sarah Blue has the three options:
1. Receiving $1,000 per year for the next 10 years:
2. Receiving $6,000 in cash immediately or
3. Receiving $10,000 in cash after 5 years.
Assuming that the current interest rate is 10%, and that Blue wants the
option that yields the highest present value, which option should she
choose?
B-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Appendix B – Time Value of Money
Solution: Alternate Demonstration Problem
Appendix B
The present value of $1,000 received annually for 10 years discounted at
10% equals $6,145.
The present value of $6,000 received now is $6,000.
The present value of $10,000 to be received five years from now is $6,209.
Therefore, Blue should choose to receive $10,000 five years from now.
B-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.