Appendix C & Chapter 8 Instructor PowerPoints

Time Value of Money
Appendix C, pp. 886-894
C-1
Time Value of Money
 Prefer payment now vs. in future due to

interest factor
 Applicable to both personal and business

decisions
C-2
Time Value of Money Factors
 Principal amount (p)

 Single lump sum
 Annuity
 Number of periods (n)
 Interest rate (i)
C-3
Simple Interest Calculation Example:
$10,000, 6% simple interest, 5 years
 Simple interest means interest is calculated
only on the principal amount.
Simple Interest
Year Interest Calculation Simple Interest
1 $10,000 x 6% = $600
2 $10,000 x 6% = $600
3 $10,000 x 6% = $600
4 $10,000 x 6% = $600
5 $10,000 x 6% = $600
Total Interest $3,000
C-4
Compound Interest Calculation
Example: $10,000, 6%, 5 years
 Compound interest means interest is calculated on the
principal and on all interest earned to date.
Compound Interest
Year Compound Interest Calculation Compound Interest
1 $10,000 x 6% = $ 600
2 ($10,000 + 600) x 6% = $ 636
3 ($10,000 + 600 + 636) x 6% = $ 674
4 ($10,000 + 600 + 636 + 674) x 6% = $ 715
5 ($10,000 + 600 + 636 + 674 + 715) x 6% = $ 758
Total Interest $ 3,383
Simple interest = $3,000

Compound interest = $3,383
$83 extra interest from compounding C-5
Present Value & Future Value
Time Periods
1 2 3 4 5 6
$10,000 $13,380
Present Value Future Value
Present value + Interest earned = Future value
C-6
Exhibit C-6, p. 890: Present Value of $1
C-7
Exhibit C-7, p. 892: Present Value
Annuity of $1
C-8
Which table to use?
 Table C-6: PV of $1 (p. 890 in textbook)

 Single payment (or cash inflow)
 Table C-7: PV of Annuity (p. 892 in textbook)

 Two or more payments – equal amounts
C-9
Which table to use?
 Example 1:You will be getting $200,000 five

years from now. Interest rate you could earn
is 6%.
C-10
Which table to use?
 Example 1:You will be getting $200,000 five

years from now. Interest rate you could earn
is 6%.
Table C-6, PV of $1
6%, 5 years: 0.747
0.747 x $200,000 = $149,400
C-11
Which table to use?
 Example 2: You will be getting $1,000 for

each of five years. Interest rate you could
earn is 4%.
C-12
Which table to use?
 Example 2: You will be getting $1,000 for

each of five years. Interest rate you could
earn is 4%.
Table C-7, PV of Annuity

4%, 5 years: 4.452
4.452 x $1,000 = $4,452
C-13
Table vs. Calculator
 Use either – more precise with calculator
 MAL is set up so that you can use either
C-14
PC-3, p. 894
C-15
PC-3, p. 894, Req 1
 2 “streams” of money (ten year $500,000 bonds

payable with stated interest rate of 12% paid
semiannually):
 $500,000 to be received 10 years from now
 Interest on $500,000 (6% twice per year)

▪ $500,000 x 6% = $30,000
▪ Also: $500,000 x 12% / 2 = $30,000
C-16
PC-3, p. 894, Req 1
 Use 6%  12% / 2 = semi-annual rate
 Use 20 periods  10 years x 2 = semi-annual
C-17
PC-3, p. 894, Req 1
 1: Principal: $500,000 to be received 10 yrs from

now
 What is it worth NOW?
 PV of $1 table from p. 890
 Look up 6%, 20 period factor
C-18
C-19
PC-3, p. 894, Req 1
 1: Principal: $500,000 to be received 10 yrs from now

 $500,000 x .312 = $156,000
C-20
PC-3, p. 894, Req 1
 2: Interest: $30,000 for 20 periods
 PV of Annuity table from p. 892
C-21
Annuity of $1
C-22
PC-3, p. 894, Req 1
 $30,000 x 11.470 = $344,100

C-23
PC-3, p. 894, Req 1
 3: Present value (market price) of bonds
 $156,000 + $344,100 = $500,100
 PV should be market value ($500,000) – ROUNDING
C-24
PC-3, p. 894, Req 2
 Now Requirement 2
 Changing facts – 14% rate (not 12%)
C-25
PC-3, p. 894, Req 2
 2 “streams” of money (ten year $500,000 bonds

payable with stated interest rate of 14% paid
semiannually):
 $500,000 to be received 10 years from now
 Interest on $500,000 (7% twice per year)

▪ $500,000 x 7% = $35,000
▪ Also: $500,000 x 14% / 2 = $35,000
C-26
PC-3, p. 894, Req 2
 Use 7%  14% / 2 = semi-annual rate
C-27
PC-3, p. 894, Req 2

now
C-28
C-29
PC-3, p. 894, Req 2

 $500,000 x .258 = $129,000
C-30
PC-3, p. 894, Req 2
C-31
Annuity of $1
C-32
PC-3, p. 894, Req 2
 $35,000 x 10.594 = $370,790

C-33
PC-3, p. 894, Req 2
 $129,000 + $370,790 = $499,790
C-34
PC-3, p. 894, Req 3
 Req 3 changes interest rate to 10%
 CORRECT Check figures on handout

 Should be $188,500 + $311,550 = $500,050
C-35
PC-4, p. 894
C-36
PC-4, p. 894, Req 1
 For calculating interest payments:

 Use STATED rate
 3.625%  7.25% / 2 = semi-annual rate
 For calculating PV:

 Use MARKET rate
 4%  8% / 2 = semi-annual rate for PV

C-37
PC-4, p. 894, Req 1

now
C-38
C-39
PC-4, p. 894, Req 1

 $400,000 x .456 = $182,400
C-40
PC-4, p. 894, Req 1
C-41
Annuity of $1
C-42
PC-4, p. 894, Req 1
 $14,500 x 13.590 = $197,055

C-43
PC-3, p. 894, Req 1
 $182,400 + $197,055 = $379,455
C-44
PC-4, p. 894, Req. 2
C-45
PC-4, p. 894, Req. 2
$400,000 - $379,455 = $20,545
round to the nearest whole dollar

C-46
PC-4, p. 894, Req. 2
$400,000 - $379,455 = $20,545
$379,455 from Req 1

($400,000 - $20,545)

C-47
PC-4, p. 894, Req. 2
$400,000 x .03625 = $14,500

C-48
PC-4, p. 894, Req. 2
$379,455 x .04 = $15,178

C-49
PC-4, p. 894, Req. 2
$15,178 - $14,500 = $678

C-50
PC-4, p. 894, Req. 2
$20,545 - $678 = $19,867

C-51
PC-4, p. 894, Req. 2
$400,000 – 19,867 = $380,133

C-52
PC-4, p. 894, Req. 2

C-53
PC-4, p. 786, Req. 3 (journal
entries)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
20X1
Dec. 31 Cash……………………………………... 379,455
Discount on Bonds Payable………… 20,545
Bonds Payable…………………….. 400,000
To issue bonds at a discount.
20X2
June 30 Interest Expense………………………. 15,178
Cash…………………………………. 14,500
Discount on Bonds Payable …….. 678
To pay interest and amortize bonds.
Dec. 31 Interest Expense………………………. 15,205

Cash…………………………………. 14,500
Discount on Bonds Payable …….. 705
To pay interest and amortize bonds.
C-54
End of Appendix C
C-55
Chapter 8
Liabilities
8-56
Learning Objective 1
 Account for Current Liabilities and

Contingent Liabilities
8-57
Categories of Current Liabilities
 Known amounts
 Unknown amounts
Current liabilities are obligations due with one year of

balance sheet date
8-58
Current Liabilities of Known Amount
Accounts Payable Short-Term Notes Payable

Amounts owed for products Common form of financing;
and services purchased on company incurs interest
account expense
Sales Tax Payable Accrued Liabilities

Tax levied by state on retail sales; Expense incurred, but not yet
company collects from paid; often an adjusting entry
customer and remits to gov’t includes salaries & interest payable
Payroll Liabilities Unearned revenues

Salaries & wages paid to Customers makes payment
employees; also includes income before receiving product
taxes and FICA taxes withheld or service
8-59
Entries for Short-Term Notes Payable
 Suppose a company purchases inventory by signing

a $10,000, 12% 90-day note payable on December 1
Date Accounts Debit Credit

1-Dec Inventory $10,000
Notes Payable, Short-Term $10,000
Purchased inventory by issuing a $10,000, 12%, 90-day note payable
31-Dec Interest Expense $100
Interest Payable $100
Accrual of interest at year-end (10,000 x 12% x 30/360)
8-60
Entries for Short-Term Notes
Payable
 The maturity date of the note would be
March 1 of the following year
1-Mar Notes Payable, Short-Term $10,000
Interest Payable $100
Interest Expense $200
Cash $10,300
Payment of the note and interest at maturity
8-61
Recording Payroll
 Each pay period salary expense and

withholdings are recorded
Gross Pay
Salary Expense $$$$
Employee Income Tax Payable $$$$
FICA Tax Payable $$$$
Salary Payable Net Pay $$$$
8-62
Unearned Revenues
 Business receives cash before earning

revenue
 Results in a liability
JOURNAL
Date Accounts and explanation Debit Credit
Cash
Unearned revenue
Received advance payment from customer
Unearned revenue
Revenue
To record earned portion of unearned revenue
8-63
Current Portion of Long-Term Debt
 Some long-term debt is paid in installments
 Any amount due in the upcoming year is

reclassified as a current liability
8-64
Current Liabilities That Are Estimated
(Amounts Unknown)
 Estimated Warranty Payable
 Contingent Liabilities
8-65
Estimated Warranty Payable
 Companies guarantee products through

warranty agreements
 Warranty expense is estimated in same
period as sale of product
 Matching principle
JOURNAL
Warranty Expense $$$$
Estimated Warranty Payable $$$$
8-66
Contingent Liabilities
 Potential liability that depends on a future

event arising out of past events
 Likelihood of future event is assessed as:

 Probable
 Reasonably possible
 Unlikely
8-67
Accounting for Contingent Liabilities
Likelihood Accounting
1. Probable  Record liability if

amount can be
estimated
2. Reasonably Possible  Include in notes to

financial statements
3. Unlikely  Do not report

8-68
E8-17A, p. 509
Turn to this exercise and read it. Give it a try…

we will go over the solution in a minute or
two…
6-69
E8-17A, p. 509
Journal
2010
Oct. 1 Cash…………………………………………. 1,512
Unearned Subscription Revenue……. 1,400
Sales Tax Payable ($1,400 × .08)…….. 112
Nov. 15 Sales Tax Payable………………………… 112

Cash………………………………………. 112
Dec. 31 Unearned Subscription Revenue………. 350

Subscription Revenue ($1,400 × 3/12) 350
BALANCE SHEET
Current liabilities:
Unearned subscription revenue ($1,400 − $350)…… $1,050
6-70
Long-Term Liabilities: Bonds
 To raise capital, companies sell bonds to the

public
 Bonds payable are groups of notes payable

issued to multiple lenders, called
bondholders
8-71
Bond Terms
Principal Amount borrowed; usually in $1000 units

Also called face value, or par value
Date bond is due; 5, 10 or 20 year terms

Maturity Date are common
Company must pay bondholders interest

Interest in regular intervals over the term of the bond
A securities firm that purchases the bond

Underwriter issue and resells to clients
8-72
Types of Bonds
 Term bonds
 All bonds in an issue mature at one specific date
 Serial bonds
 Bonds in the issue mature in installments
 Secured (mortgage) bonds

 Bondholders have right to company assets if interest and
principal is not paid
 Unsecured (debenture) bonds

 Backed only by the good faith of the issuing company
8-73
Interest Rates & Bond Prices
 Bonds always sold at market price

 Bond’s present value
 Two interest rates set bond price

 Stated interest rate (coupon rate)
▪ Printed on bond certificate
▪ Determines cash interest paid to bondholders
 Market interest rate (effective interest rate)
▪ Demanded by investors for loaning money
▪ Varies minute to minute
Stated rate usually differs from market rate
8-74
Bond Premium and Discount
Premium Discount
 Issue price above face  Issue price below face
value value
 Stated rate of interest  Stated rate of interest
is greater than market is less than market rate
rate of interest of interest
Market interest rate = rate investors demand for loaning money; changes
frequently
Stated interest rate = printed on the bond certificate; determines amount

of cash interest; remains constant
8-75
E8-19A, p. 509
2010:
May 1 – Purchased truck costing $83,000 by
issuing a one year, 6% note payable
Dec 31 – Accrued interest on note payable
2011:
May 1 – Paid note payable at maturity
6-76
E8-19A, p. 509
Interest to
Req. 1 accrue at = $83,000 × .06 × 8/12 = $3,320
Dec. 31, 2010
Final payment
Req. 2 on May 1, 2011
= $83,000 + ($83,000 × .06) = $87,980
Interest expense for:

Req. 3 2010 = $83,000 × .06 × 8/12 = $3,320
2011 = $83,000 × .06 × 4/12 = $1,660
6-77
E8-19A, p. 509
Interest to
Req. 1 accrue at = $83,000 × .06 × 8/12 = $3,320
Dec. 31, 2010
Final payment
Req. 2 on May 1, 2011
= $83,000 + ($83,000 × .06) = $87,980

Req. 3 2010 = $83,000 × .06 × 8/12 = $3,320
2011 = $83,000 × .06 × 4/12 = $1,660
6-78
E8-19A, p. 509
Interest to
Req. 1 accrue at = $83,000 × .06 × 8/12 = $3,320
Dec. 31, 2010
Final payment
Req. 2 on May 1, 2011
= $83,000 + ($83,000 × .06) = $87,980

Req. 3 2010 = $83,000 × .06 × 8/12 = $3,320
2011 = $83,000 × .06 × 4/12 = $1,660
6-79
 Account for Bonds Payable
8-80
Issuing Bonds Payable at Face Value
 Suppose a company issues $100,000 of 8%

bonds payable that mature in ten years; the
bonds pay interest semi-annually
1-Jan Cash $100,000
Bond payable $100,000
Issued $100,000, 8%, 10-year bonds at face value
1-Jul Interest Expense $4,000
Cash $4,000
Paid semi-annual interest on bonds
8-81
Issuing Bonds at a Discount
 If stated interest rate of bonds is less than

market interest rate, bondholders will not
pay face value for bond
 Market price of bond drops below face value
 Cash received from bond issue is less than

face value
8-82
Issuing Bonds at a Discount
 Suppose a company issues $100,000 of 9%,

five-year bonds when the market interest
rate is 10%
 The market price of the bonds is $96,149

1-Jan Cash $96,149
Discount on Bonds Payable $3,851
Bonds payable $100,000
Issued $100,000, 9%, 10-year bonds at a discount
8-83
Carrying Amount: Bonds Issued
at a Discount
 Bonds are shown at their carrying amount on
the balance sheet
Carrying amount = Face value Less Discount Balance

Balance Sheet
January 1
Long-Term Liabilities:
Bonds Payable $100,000
Less: Discount ($3,851) $96,149
8-84
S 8-8, p. 506

two…
6-85
S 8-8, p. 506
2010
a. July 1 Cash 80,000
Bonds Payable 80,000
To issue bond at par.
b. Dec. 31 Interest Expense ($80,000 × .055 × 6/12) 2,200

Interest Payable 2,200
To accrue interest expense.
8-86
S 8-8 (continued)
2011
c. Jan. 1 Interest Payable 2,200
Cash 2,200
To pay semiannual interest on bonds.
2025
d. July 1 Bonds Payable 80,000
Cash 80,000
To pay bonds at maturity.
8-87
 Measure Interest Expense
8-88
Interest Payment vs. Interest Expense
Stated
Interest Face
payment value
interest 1/2
rate
Market
Interest Carrying
expense amount
interest 1/2
rate
8-89
Interest Expense on Bonds Issued at a
Discount
 The company must pay interest based on the
face value even though it received less than
face value
▪ Interest Expense > Cash Payment
▪ Interest Expense = Carrying Amount of Bond x Market
Interest Rate
 Discount is amortized (reduced) over the bond

term
▪ Discount Amortization = Interest Expense - Cash Payment
8-90
Recording Interest on Bonds Issued at
a Discount
 Referring to the previous example, interest expense on
July 1 would be recorded as follows:
1. Interest expense is debited for the carrying amount x market rate x ½
2. Cash is credited for the face value x stated rate x ½
3. Discount is credited for the difference between the expense and
payment

1-July Interest Expense (96,149 x 5%) $4,807
Discount on Bonds Payable $307
Cash ($100,000 x 4.5%) $4,500
To pay semiannual interest and amortize bond discount
8-91
Discount on Bonds Payable
Issue Date, $3,851 $307 1st Int. Pmt,
Jan. 1 July 1
Balance, $3,544
July. 1
Balance Sheet
July 1
Less: Discount ($3,544) $96,456
8-92
S 8-9, p. 506

two…
6-93
S 8-9 (req. 1), p. 506
A B C D E
Interest
Interest Expense Discount Bond
Payment (4% of Account Carrying
Semiannual (2.5% of Preceding Discount Balance Amount
Interest Maturity Bond Carrying Amortization (Preceding ($600,000
Date Value) Amount) (B - A) D - C) - D)
Mar. 31, 2010 $138,000 $462,000
Sept. 30, 2010 $15,000 $18,480 $3,480 134,520 465,480

Mar. 31, 2011 15,000 18,619 3,619 130,901 469,099
Sept. 30, 2011 15,000 18,764 3,764 127,1378 472,873
8-94
S 8-9 (req. 2)
Journal
ACCOUNT TITLES AND
DATE EXPLANATION DEBIT CREDIT
2010
Mar. 31 Cash ($600,000 × .77) 462,000
Discount on Bonds Payable 138,000
Bonds Payable 600,000
Sept. 30 Interest Expense 18,480

Discount on Bonds Payable 3,480
Cash 15,000
8-95
Issuing Bonds at a Premium
 If stated interest rate of bonds is greater than

market interest rate, bondholders will pay
more than face value for bond
 Market price of bond increases above face

value
 Cash received from bond issue is greater than

face value
8-96
Issuing Bonds at a Premium
 Suppose a company issues $100,000 of 9%,

five-year bonds when the market interest
rate is 8%
 The market price of the bonds is $104,100

1-Jan Cash $104,100
Premium on Bonds Payable $4,100
Issued $100,000, 9%, 10-year bonds at a premium
8-97
Carrying Amount: Bonds Issued
at a Premium
 Bonds are shown at their carrying amount on
the balance sheet
 Carrying amount = Face value Plus Premium Balance
Balance Sheet
January 1
Plus: Premium $ 4,100 $104,100
8-98
Interest Expense on Bonds
Issued at a Premium
 The company pays interest based on only the
face value even though it received more than
face value
▪ Interest Expense < Cash Payment
▪ Interest Expense = Carrying Amount of Bond x Market
Interest Rate
 Premium is amortized (reduced) over the

bond term.
▪ Premium Amortization = Cash Payment – Interest
Expense
8-99
Recording Interest on Bonds Issued at
a Premium
 Referring to the previous example, interest expense
on July 1 would be recorded as follows:
▪ Interest expense is debited for the carrying amount x market rate x ½
▪ Cash is credited for the face value x stated rate x ½
▪ Premium is debited for the difference between the expense and payment

1-July Interest Expense (104,100 x 4%) $4,164
Premium on Bonds Payable $336
Cash ($100,000 x 4.5%) $4,500
Issued $100,000, 9%, 10-year bonds at a discount
8-100
Premium on Bonds Payable
1st Int. Pmt, $336 $4,100 Issue Date,
July 1 Jan. 1
$3,764 Balance,
July. 1
Balance Sheet
July 1
Plus: Premium $3,764 $103,764
8-101
Straight-Line Method
Discount or premium
Amortization
Number of interest payments
Interest payment
Interest Interest
OR Amortization
expense payment
8-102
Retiring Bonds Before Maturity
 Interest rates may change causing companies

to retire bonds early
 Borrowing rates may become less than interest
rate on bonds
 Some bonds are callable

 Company can pay off bonds a specific price
8-103
Convertible bonds
 Bondholders may exchange bonds for

company’s stock
 Offers investor:
 Assured receipt of interest and principal on bonds
 Opportunity for gains on stock
Investors will accept a lower interest rate on bonds because of

the attractiveness of this feature.
8-104
E8-27A, p. 511

two…
6-105
E8-27A (req. 1), p. 511
A B C D E
INTEREST
EXPENSE
INTEREST (2% OF PREMIUM
PAYMENT PRECEDING ACCOUNT BOND
SEMIANNUAL (2½% OF BOND PREMIUM BALANCE CARRYING
INTEREST MATURITY CARRYING AMORTIZATION (PRECEDING AMOUNT
DATE VALUE) AMOUNT) (A – B) D – C) ($800,000 + D)
June 30, 2010 $136,040 $939,0401
Dec. 31, 2010 $20,000 $18,781 $1,219 137,821 937,821
June 30, 2011 20,000 18,756 1,244 136,577 936,577
Dec. 31, 2011 20,000 18,732 1,268 135,309 935,309
June 30, 2012 20,000 18,706 1,294 134,015 934,015
1
$800,000 × 1.1738 = $939,040
6-106
E8-27A (req. 2), p. 511
Journal
2010
June 30 Cash ($800,000 x 1.1738)…………….. 939,040
Bonds Payable……………………... 800,000
Premium on Bonds Payable…….. 139,040
To issue bonds at a premium.
Dec. 31 Interest Expense………………………. 18,781

Premium on Bonds Payable………… 1,219
Cash………………………………….. 20,000
To pay semiannual interest and amortize
bonds.
2011
June 30 Interest Expense………………………. 18,756
Premium on Bonds Payable.………... 1,244
Cash………………………………….. 20,000
To pay semiannual interest and amortize bonds.
6-107
 Understand the Advantages and

Disadvantages of Borrowing
8-108
Financing Operations with Bonds or
Stock
 When a company needs funds, they can raise
money by:
 Issuing stock
▪ No liabilities or interest expense
▪ Less risky
▪ More costly
 Issuing bonds or notes
▪ Does not dilute control of company
▪ Results in higher earnings per share
▪ More debt increases risk
8-109
E8-31A, pp. 512-513

two…
6-110
E8-31A, pp. 512-513
Plan A—Borrow at 10%
Net Income before expansion $600,000
Additional income 800,000
Less interest expense (800K × 10%) (80,000)
720,000
Less income tax expense (25%) (180,000)
Expected additional income 540,000
Total company net income $1,140,000
Earnings per share (200,000 shares) $ 5.70
8-111
E8-31A
Plan B - Issue Stock
Net Income before expansion $ 600,000
Additional income 800,000
Less interest expense -
800,000
Less income tax expense (200,000)
Expected additional income 600,000
Total company net income $1,200,000
Earnings per share (400,000 shares) $ 3.00
8-112
Times-Interest-Earned
 Also called interest-coverage ratio
 Relates income to interest expense
Operating income
Interest expense
8-113
Leases
 Lease–rental agreement in which the tenant

(lessee) agrees to make rent payments to the
property owner (lessor)
 Two categories:
 Operating
 Capital
8-114
Operating Leases
 Usually short-term or cancelable
 Lessor retains risks and rewards of owning

asset
 Lessee records “rent expense” when

payments are made
8-115
Capital Leases
 Long-term noncancelable debt
 Four criteria
 Title transfers to lessee at end of lease
 Lease contains a bargain purchase option
 Lease term is 75% or more of asset’s life
 Present value of lease payments is 90% or more
than fair value of leased asset
If lease meets one of the above criteria, it is considered a capital lease
8-116
Pensions and Postretirement Liabilities
 Expense recorded while employees work for

the company
 Cash contributed into pension plan assets
 Obligations grows for future payments to
employees
Underfunded Overfunded
Plan assets less than Plan assets greater
obligation than obligation
8-117
 Report Liabilities on the Balance Sheet
8-118
Liabilities on the Balance Sheet
 Current liabilities are listed and include the

current portion of long-term debt
 Long-term debt is often reported as one

amount on the balance sheet
 A disclosure note provides the detail of long-

term debt
8-119
Long-Term Liabilities on the Cash Flow
Statement
 Issuing bonds and long-term borrowing are
reported as financing inflows
 Payments of bond and loan principal are

reported as financing outflows
 Interest expense is reported in the operating

section
8-120
S 8-15, p. 508

two…
6-121
S 8-15, p. 508
LIABILITIES
Current:
Accounts payable $ 36,000
Current portion of bonds payable 51,000
Interest payable 1,000
Total current liabilities $ 88,000
Long term:
Notes payable, long-term 300,000
Less: Discount on bonds payable (12,000) 388,000
Total liabilities $776,000
8-122
End of Chapter 8
8-123

Appendix C &amp; Chapter 8 Instructor PowerPoints

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Appendix C &amp; Chapter 8 Instructor PowerPoints

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Time Value of Money

Appendix C, pp. 886-894

 Prefer payment now vs. in future due to

 Applicable to both personal and business

 Principal amount (p)

 Number of periods (n)

 Interest rate (i)

Simple interest = $3,000

Present value + Interest earned = Future value

 Table C-6: PV of $1 (p. 890 in textbook)

 Table C-7: PV of Annuity (p. 892 in textbook)

 Example 1:You will be getting $200,000 five

 Example 1:You will be getting $200,000 five

 Example 2: You will be getting $1,000 for

 Example 2: You will be getting $1,000 for

Table C-7, PV of Annuity

 Use either – more precise with calculator

 MAL is set up so that you can use either

 2 “streams” of money (ten year $500,000 bonds

 $500,000 to be received 10 years from now

 Interest on $500,000 (6% twice per year)

 Use 6%  12% / 2 = semi-annual rate

 Use 20 periods  10 years x 2 = semi-annual

 1: Principal: $500,000 to be received 10 yrs from

 PV of $1 table from p. 890

 Look up 6%, 20 period factor

 1: Principal: $500,000 to be received 10 yrs from now

 PV of $1 table from p. 890

 Look up 6%, 20 period factor

 $500,000 x .312 = $156,000

 2: Interest: $30,000 for 20 periods

 What is it worth NOW?

 PV of Annuity table from p. 892

 Look up 6%, 20 period factor

 2: Interest: $30,000 for 20 periods

 What is it worth NOW?

 PV of Annuity table from p. 892

 Look up 6%, 20 period factor

 $30,000 x 11.470 = $344,100

 3: Present value (market price) of bonds

 $156,000 + $344,100 = $500,100

 PV should be market value ($500,000) – ROUNDING

 Changing facts – 14% rate (not 12%)

 2 “streams” of money (ten year $500,000 bonds

 $500,000 to be received 10 years from now

 Interest on $500,000 (7% twice per year)

 Use 7%  14% / 2 = semi-annual rate

 Use 20 periods  10 years x 2 = semi-annual

 1: Principal: $500,000 to be received 10 yrs from

 PV of $1 table from p. 890

 Look up 7%, 20 period factor

 1: Principal: $500,000 to be received 10 yrs from now

 PV of $1 table from p. 890

 Look up 7%, 20 period factor

 $500,000 x .258 = $129,000

 2: Interest: $35,000 for 20 periods

 What is it worth NOW?

 PV of Annuity table from p. 892

 Look up 7%, 20 period factor

 2: Interest: $35,000 for 20 periods

 What is it worth NOW?

 PV of Annuity table from p. 892

 Look up 7%, 20 period factor

 $35,000 x 10.594 = $370,790

Appendix C & Chapter 8 Instructor PowerPoints

Appendix C & Chapter 8 Instructor PowerPoints