978-1118334324 Appendix G Lecture Note Part 1

APPENDIX G

LEARNING OBJECTIVES

1. DISTINGUISH BETWEEN SIMPLE AND COMPOUND

INTEREST.

2. SOLVE FOR FUTURE VALUE OF A SINGLE AMOUNT.

3. SOLVE FOR FUTURE VALUE OF AN ANNUITY.

4. IDENTIFY THE VARIABLES FUNDAMENTAL TO SOL-

VING PRESENT VALUE PROBLEMS.

5. SOLVE FOR PRESENT VALUE OF A SINGLE AMOUNT.

6. SOLVE FOR PRESENT VALUE OF AN ANNUITY.

7. COMPUTE THE PRESENT VALUE OF NOTES AND

BONDS.

8. COMPUTE THE PRESENT VALUES IN CAPITAL

BUDGETING SITUATIONS.

9. USE A FINANCIAL CALCULATOR TO SOLVE TIME

VALUE OF MONEY PROBLEMS.

APPENDIX G REVIEW

Value of Interest

1. (L.O. 1) Interest is payment for the use of another person’s money. The amount of interest involved

c. Time: The number of years that the principal is borrowed or invested.

2. Simple interest is computed on the principal amount only. Simple interest is usually expressed as:

Interest = Principal X Rate X Time

3. Compound interest is computed on principal and on any interest earned that has not been paid or

Future Value of a Single Amount

4. (L.O. 2) The future value of a single amount is the value at a future date of a given amount

invested assuming compound interest. Future value is usually expressed as:

FV = P X (1 + i)n

FV = future value of a single amount

P = principal

i = interest rate for one period

n = number of periods

5. The Future Value of 1 table is used for obtaining a 5-digit decimal number which is multiplied by the

principal to calculate the future value.

Future Value of an Annuity

6. (L.O. 3) The future value of an annuity is the sum of all the payments (receipts) plus the

the future value can be computed by using a future value of an annuity of 1 table.

Present Value Variables

7. (L.O. 4 and 5) The present value is based on three variables: (1) the dollar amount to be received

(future amount), (2) the length of time until the amount is received (number of periods), and (3) the

interest rate (the discount rate).

PV = FV/(1 + i)

PV = present value

FV = future value

i = interest rate

8. The present value of 1 may also be determined through tables that show the present value of 1 for n

periods.

Present Value of an Annuity

9. (L.O. 6) In computing the present value of an annuity, it is necessary to know (1) the discount rate,

(2) the number of discount periods, and (3) the amount of the periodic receipts or payments. When

Second, annuity tables may be used.

Time Periods and Discounting

Computing the Present Value of a Long-Term Note or Bond

11. (L.O. 7) The present value (or market price) of a long-term note or bond is a function of three

12. (L.O. 8) The decision to make long-term capital investments is best evaluated using discounting

13. If the net present value of a capital investment is positive, the proposal should be accepted (make the

Using a Financial Calculator

14. (L.O. 9) Financial calculators can be used to solve the same and additional problems as those solved

presented in the compound interest tables.

LECTURE OUTLINE

A. Nature of Interest

1. Interest is payment for the use of another person’s money. It is the

and the amount repaid or collected.

2. The amount of interest involved in any financing transaction is based on:

invested.

3. Simple interest is computed on the principal amount only.

4. Compound interest is computed on principal and on any interest earned

that has not been paid or withdrawn. It is the return on the principal for two

or more time periods.

B. Future Value of a Single Amount

1. The future value of a single amount is the value at a future date of a given

amount invested assuming compound interest.

2. The future value of a single amount can be computed using the following

formula:

FV = p X (1 + i )n

p = principal; i = interest rate; n = number of periods.

3. Another way to compute the future value of a single amount is to use Table

1, which shows the future value of 1 for n periods.

4. Using Table 1, the future value of a single amount is computed by

multiplying the principal by the appropriate future value of 1 factor.

C. Future Value of an Annuity

1. An annuity is an equal dollar amount of payments or receipts.

2. The future value of an annuity is the sum of all the payments (receipts) plus

the accumulated compound interest on them.

3. In computing the future value of an annuity, it is necessary to know the:

a. interest rate,

b. number of compounding periods,

of periods.

D. Present Value Variables

1. The present value is based on the:

a. dollar amount to be received (future amount),

b. length of time until the amount is received (number of periods),

c. interest rate (the discount rate).

the future amount.

E. Present Value of a Single Amount

1. The present value of a single amount is the value today of a future amount

formula:

PV = FV ÷ (1 + i )n

FV = future amount; i = interest rate; n = number of periods.

1 factor.

F. Present Value of an Annuity

1. The present value of an annuity is the value today of a series of future

receipts or payments, discounted assuming compound interest.

2. In computing the present value of an annuity, one needs to know the:

a. discount rate.

b. number of discount periods.

of periods.