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APPENDIX G
TIME VALUE OF MONEY
LEARNING OBJECTIVES
1. COMPUTE INTEREST AND FUTURE VALUES.
2. COMPUTE PRESENT VALUE.
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
in any financing transaction is based on three elements:
a. Principal: The original amount borrowed or invested.
b. Interest Rate: An annual percentage of the principal.
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:
Future Value of a Single Amount
4. 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
Future Value of an Annuity
6. The future value of an annuity is the sum of all the payments (receipts) plus the accumulated
compound interest on them. In computing the future value of an annuity, it is necessary to know the
Present Value Variables
7. (L.O. 2) 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).
Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 12/e, Instructor’s Manual (For Instructor Use Only) G-3
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. 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 the future
Time Periods and Discounting
10. Discounting may also be done over shorter periods of time such as monthly, quarterly, or
semiannually. When the time frame is less than one year, it is necessary, to convert the annual
interest rate to the applicable time frame.
Computing the Present Value of a Long-Term Note or Bond
11. The present value (or market price) of a long-term note or bond is a function of three variables: (1) the
Computing the Present Values in Capital Budgeting Situations
12. (L.O. 3) The decision to make long-term capital investments is best evaluated using discounting
techniques that calculate the present value of the cash flows involved in a capital investment.
13. If the net present value of a capital investment is positive, the proposal should be accepted (make the
investment). If the net present value is negative, the proposal should be rejected.
Using a Financial Calculator
14. (L.O. 4) Financial calculators can be used to solve the same and additional problems as those solved
LECTURE OUTLINE
A. Nature of Interest
1. Interest is payment for the use of another person’s money. It is the
difference between the amount borrowed or invested (called the principal)
and the amount repaid or collected.
2. The amount of interest involved in any financing transaction is based on:
a. Principal (p): The original amount borrowed or invested,
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
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,
D. Present Value Variables
1. The present value is based on the:
a. dollar amount to be received (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
to be received (or paid), assuming compound interest.
2. The present value of a single amount can be computed using the following
formula:
PV = FV ÷ (1 + i )n
FV = future amount; i = interest rate; n = number of periods.
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.
G. Computing the Present Value of a Long-Term Note or Bond
1. The present value (or market price) of a long-term note or bond is a
function of the:
a. payment amounts.
b. length of time until the amounts are paid.
c. discount rate.
3. To compute the present value of the bond, one must discount both the
interest payments and the principal amount.
a. Multiply the principal amount by the appropriate present value factor
from Table 3.
b. Multiply the amount of the interest payments by the appropriate
present value factor from Table 4.
H. Computing the Present Values in a Capital Budgeting Decision
1. The decision to make long-term capital investments is best evaluated using
discounting techniques that recognize the time value of money. This is
done by calculating the present value of the cash flows involved in a capital
investment.
2. When the present value of the cash receipts (inflows) from a capital
I. Using Financial Calculators.
1. Financial calculators can be used to solve present and future value
problems using the following keys.
a. N = Number of periods
b. I = interest rate per period
10 MINUTE QUIZ
Circle the correct answer.
True/False
1. Simple interest is computed on the principal and any interest earned that has not been paid
or received.
True False
2. The future value of an annuity is the sum of all the payments plus the accumulated
compound interest on them.
True False
3. The process of determining the present value is referred to as discounting the present
amount.
True False
4. In computing the present value of an annuity, it is necessary to know the discount rate, the
number of discount periods, and the amount of the periodic payments.
True False
5. To compute the present value of a bond, both the interest payments and the principal
amount must be discounted.
True False
Multiple Choice
1. Interest that is computed on the principal and any interest earned is called
a. simple interest.
b. present interest.
c. future interest.
d. compound interest.
2. The value at a future date of a given amount invested assuming compound interest is the
a. compounded value of a single amount.
b. compounded value of an annuity.
c. future value of a single amount.
d. future value of an annuity.
3. The process of determining the present value is referred to as discounting the
a. compound amount.
b. future amount.
c. present amount.
d. simple amount.
4. In computing the present value of an annuity, it is not necessary to know the
a. discount rate.
b. number of discount periods.
c. amount of the periodic payments.
d. year the payments will begin.
5. Cogswell Company issued 6%, 10-year bonds that pay interest semiannually. The discount
rate of interest for such bonds is 8%. In computing the present value of these bonds, the
appropriate discount rate is
a. 8%.
b. 6%.
c. 4%.
d. 3%.
ANSWERS TO QUIZ
True/False
1. False
2. True
Multiple Choice
1. d.
