Chapter 9 Present Value Accounting 215 Winter 2026 Steph Grant 1 2 Plan for Today Review of last class In the News Disney World Taking Up to 300 Million Loss on Star Wars Galactic Starcruiser What does it mean that Disney is taking a loss after closing this hotel Think about how Disney will account for the early retirement Today we will learn 1 Present Value 2 Midterm Exam 2 Review In the News 1 What does it mean that Disney is taking a loss after closing this hotel Think about how Disney will account for the early retirement Star Wars Galactic Starcruiser will permanently close in Fall 2023 and with that they will write off up to 300 million D Amaro started his response by lavishing praise upon Starcruiser calling it stunning and saying how Cast Members did an exceptional job in bringing it to life He added that Imagineers did an incredible job pulling it together and guests give it very high ratings Despite that D Amaro conceded that Star Wars Galactic Starcruiser did not perform exactly how we wanted it to perform so we decided that we re going to sunset this in September D Amaro added that it was a never before seen type of experience and I think it s raised the bar from a creativity perspective on where we can go next Time Value of Money True or False If you won a bet with me and I will pay you either 1 000 today or 1 300 in four years which would you prefer To help you answer that question rationally you need to think about compounding interest Simple interest what we have talked about so far in this class Compounding interest where we re heading now Interest calculated on principal accumulating interest 3 4 What is Time Value of Money If you deposit 1 000 today and the interest rate is 10 how much will you have in four years 1 464 is the future value of 1 000 Present Value Year Principal at beginning of year Interest at 10 per year Accumulated at end of year 1 2 3 4 1 000 1 100 1 210 1 331 100 110 121 133 1 100 1 210 1 331 1 464 You can ask a second question from another perspective If you need 1 464 four years from now how much do you need to deposit today if the investment earns 10 interest annually 1 000 is the present value of 1 464 Future Value Present Value Calculations Scenario 1 Present Value of a Single Amount Amount Present Value Present Value Factor Three Inputs i interest rate discount rate N number of periods Amount Future Value Example If you need 1 464 in four years from now how much would you need to deposit today if the investment earns 10 interest annually 1 464 0 68301 1 464 999 92 Present Value 1 000 5 6 Find the Present Value Factor with Tables Example If you need 1 464 in four years from now how much would you need to deposit today if the investment earns 10 interest annually Find the column with your interest rate Find the row with your of periods Where they intersect is your present value factor Present Value Present Value Factor Amount 0 68301 1 464 999 92 1 000 Same answer as using the formula on the prior slide You Try The annual interest rate is 6 Which of the following would you prefer to receive 1 100 000 in six years 2 80 000 today 3 40 000 today and 45 000 in two years 7 8 You Try The annual interest rate is 6 Which of the following would you prefer to receive 1 100 000 in six years 2 80 000 today 3 40 000 today and 45 000 in two years 9 10 Frequency Scenario 1 Present Value of a Single Amount Rates are usually provided as annual rates if compounding is more frequent than annually i e semi annually quarterly then divide annual rate by number of compounding periods per year Example If you need 1 464 in four years from now how much would you need to deposit today if the investment earns 10 interest compounded semi annually Annual compounding i 10 n 4 Semi annual compounding i 10 2 5 n 4 2 8 compounding periods Present Value Tables Semi Annual Compounding Example If you need 1 464 in four years from now how much would you need to deposit today if the investment earns 10 interest compounded semi annually 1 464 Present Value 0 67684 1 464 990 89 Present Value Present Value Calculations Scenario 2 Present Value of an Annuity An annuity is a series of consecutive payments characterized by 1 An equal dollar amount per period 2 Interest periods of equal length 3 The same interest rate each period Example three equal payments over the next 3 years Amount Amount Amount Present Value Three Inputs i interest rate discount rate N number of periods Amount Future Value in each period 11 12 Present Value Calculations Some Math to Derive the Annuity Formula Amount Amount Amount We can reorganize that formula like this Present Value Present Value Amount Present Value Amount And finally re write like this Present Value Factor Three Inputs i interest rate discount rate N number of periods Amount Future Value in each period Note don t worry about memorizing all the math on this slide you just need to be able to use this final formula or the tables Present Value Tables Annuity Example Example Suppose you need to pay 50 000 in 6 months and 50 000 in 1 year with an annual rate of 3 What is the present value 13 14 Present Value Calculations Scenario 3 Present Value of an Annuity Single Amount in the End Annuity Annuity Single Amount Annuity PV Annuity PV Single Amount Inputs i interest rate discount rate N number of periods Example of Present Value of an Annuity Single Amount in the End Example Suppose a gym owner purchased a set of pull up rigs and weightlifting power racks with a loan The term of the loan is that the gym owner must pay 5 000 at the end of every year for the next three years and an additional 10 000 at the end of year 3 Assume that the current annual discount rate is 5 how much is the gym owner paying for the gym equipment in present value terms 15 16 Present Value Tables Present Value Tables 17 18 Why Do We Need PV in Accounting Many business transactions that affect long term liabilities require accountants to compute present value We defer the accounting of long term liabilities to more advanced accounting classes We will use the present value concepts for bond related transactions in the next class 19 20 Your To Do s Section A Monday Tuesday TODAY Wednesday 2 11 Main Lecture Finish Checkout Q s Review lecture notes Thursday 2 12 Quiz Section Review and practice Ch 9 PV 2 16 NO Main Lecture Presidents Day 2 17 Quiz …