Appendix C: Time Value of Money (2 pages)

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Appendix C: Time Value of Money



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Appendix C: Time Value of Money

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Lecture number:
17
Pages:
2
Type:
Lecture Note
School:
University of Arizona
Course:
Acct 200 - Introduction to Financial Accounting
Edition:
1

Unformatted text preview:

ACCT 200 1st Edition Lecture 17 Outline of Last Lecture I Miscellaneous II BE 8 1 III Unearned Revenues IV Contingent Liabilities V Warranties VI BE 8 9 VII Contingent Gains VIII E 8 16 Outline of Current Lecture I BE C 2 II BE C 5 III BE C 8 IV BE C 11 V BE C 12 VI Miscellaneous VII Example Current Lecture BE C 2 5 years 10 000 current amount of cash present value Needs either 14 000 for car or 18 000 for car w turbo in 5 years 10 interest he can earn 10 000 single sum FV of 1 table 5 yrs 10 10 000 1 61051 16 105 1 Can buy car but not turbo BE C 5 5000 bonus if she stays 5 years at company 7 interest rate What is the value now of the 5000 she will get in the future 5000 71299 3564 95 in real life don t know interest rate will stay constant BE C 8 Need to save 20 000 for a cruise 3000 per year for next 6 years 9 compound interest 3000 FV of annuity 6 yrs at 9 table 3 3000 7 5233 22 569 90 Yes can go on cruise BE C 11 Awarded 4 year scholarship 8000 yr at end of year Assume 6 interest rate what is value of scholarship today 8000 PVA of 4 yrs 6 8000 3 46511 27720 88 BE C 12 Company wants to purchase a 35 000 piece of equipment Expects to get additional revenues of 5000 yr for 10 years Assuming 10 interest rate does this make sense to buy 5000 PVA factor of 10 yrs at 10 interest 5000 6 14457 30 722 85 Costs 35 000 now so shouldn t buy Watch wording annuity lump sum future or present Bond bond issuer borrows money and regularly pays the interest Sold in 1000 increments Bonds spread the risk Will study next chapter Example Issue borrow 1 mil bond 10 yrs pay interest semi annually twice a year per 6 months 6 annual interest rate Get cash now pay back single sum of 1 mil in 10 years Also have to pay interest 2 times yr every year for 10 years annuity Bond value is based on the present value of the principal PLUS the present value of the interest payments 20 interest payments 10 yr 2 per year 6 annual rate so each payment is based on 3 1 2 of full rate 1 mil PV1 20 periods



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