Exam 3: Time Value of Money - Finding Present Value

10000; compounded

Assume an investment promises to pay $10000 in 3 years. The annual interest rate is 6%. The future value is $_. To find n and i, we must know how frequently the interest is _.

Future Value; pv factor; $8374.80; $8374.80; 6; 3

From the present value table, the pv factor for n=6, and i=3% is .83748 present value = $10000( _ ) pv = _ That means that if we could invest _ today at _% compounded semi-annually, the investment would be worth $10000 in _ years

today; future

In accounting, we often want to know the value _ of some amount that we expect to receive or pay in the _. The value today of that future amount is the present value.

present value; present value

Mathematicians have developed formulas to calculate _ _; accountants have used those formulas to create _ _ tables to simplify the calculations.

Payment (where payment = amount of each equal future cash flow); annuity factor (found using n and i from the annuity table)

Present value of an ordinary annuity = ( _ ) ( _ )

don't forget

Slide 14-21

rate; periods

The interest rate per period is the annual _ divided by the number of compounding _ each year.

interest; years

The number of periods that interest is compounded is the number of _ periods per year multiplied by the number of _ until the payment is received or paid.

more; invested; additional; sooner; later

The time value of money is the idea that a dollar received today is worth _ than a dollar to be received in the future, because today's dollar can be _ to earn _ income. This concept explains why we prefer to receive cash _ rather than _.

.1486

You need $201,800 in 20 years and have $30,000 to invest today. What annual interest rate must you earn in order to have the required amount? future value = $201,800 present value (pv) = $30,000 pv factor = _ n = 20 Now, on the chart you would need to find the intersection n = 20 and i = x to find where the pv factor = .1486. (In this case, i = 10%)

6; 4%; $59,273.25

You need $75000, how much would you need to deposit today in a savings account earning 4% interest, compounded annually over 6 years to have the desired cash flow, homie? n=_ i=_ pv factor = .79031 pv = _

20; 2% (8% compounded 4 times a year = 8/4); $302,837

You want $450,000 in 5 years. How much should you deposit today in account earning 8% interest, compounded quarterly? n = _ i = _ pv factor = .67297 present value =_

Simple; principal

_ interest means that interest is calculated on only the _ amount, or amount originally invested (or borrowed).

Compound; principal; interest

_ interest means that interest is calculated on the _ and on all previous earned _ that remains invested.

long; present value

_ term liabilities must often be reported on a company's financial statements as the _ _ of the obligation; that is, the liability reported is the value of the future cash payments required to repay the loan.

Loan

a common example of an annuity is a _ that requires periodic equal payments.

cash flows

an annuity is a series of equal _ _ at regular intervals.

i

the interest rate per period

n

the number of periods that interest is compounded