PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPACopyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Time Value of Money ConceptsChapter 66-2Simple InterestInterest amount=P i nAssume you invest $1,000 at 6%simple interest for 3 years.ou !oul" earn $1#0 interest.$$1,000 .06 3=$1#0%$or $60 each year for 3 years%6-3Compound Interest Assume !e "eposit $1,000 in a &an' t(at earns 6% interest )ompoun"e" annually.What is the balance inour account at theend of three years?6-*Compound Interest6-+Future Value of a Single Amount,(e future value of a sin-le amount is t(e amount of money t(at a "ollar !ill -ro! to at some point in t(e future.Assume !e "eposit $1,000 for t(ree years t(at earns 6% interest )ompoun"e" annually."#,$$$.$$ % #.$&'"#,$&$.$$and"#,$&$.$$ % #.$&'"#,#().&$and"#,#().&$ % #.$&'"#,#*#.$(6-6Future Value of a Single Amount.ritin- in a more e/)ient !ay, !e )an say . . . .$1,101.02=$1,000 11.0623FV=PV (1 + i)nFutureValueFutureValueAmount Invested at the Beginning of the eriodAmount Invested at the Beginning of the eriodInterest!ateInterest!ate"umberof #om$ounding Periods"umberof #om$ounding Periods6-34sin- t(e 5uture 6alue of $1 ,a&le, !e 7n" t(e fa)tor for 6% an" 3 perio"s is 1.10102.8o, !e )an solve our pro&lem li'e t(is. . .FV%$&'000 ( &)&*&0+FV%$&'&*&)0+Future Value of a Single Amount6-#Present Value of a Single AmountInstea" of as'in- !(at is t(e future value of a )urrent amount, !e mi-(t !ant to 'no! !(at amount !e must invest to"ay to a))umulate a 'no!n future amount.,(is is a present value 9uestion.Present value of a sin-le amount is to"ay:s e9uivalent to a parti)ular amount in t(e future.6-0Present Value of a Single Amount;emem&er our e9uationuste" ris'-free rate of interest. 6-16Basic AnnuitiesAn annuity is a seriesof e9ual perio"i) payments.eriod & eriod +eriod 3 eriod 3$&0'000 $&0'000 $&0'000 $&0'0006-13An annuity !it( payments at t(e en" of t(e perio" is 'no!n as an or"inary annuity.Ordinary Annuity4nd of year &$&0'000 $&0'000 $&0'000 $&0'000& + 3 30oday4nd of year +4nd of year 34nd of year 36-1#Annuity DueAn annuity !it( payments at t(e &e-innin- of t(e perio" is 'no!n as an annuity "ue.(e)innin) of *ear 1$10,000 $10,000 $10,000 $10,0001 2 + ,Toda*(e)innin) of *ear 2(e)innin) of *ear +(e)innin) of *ear ,6-10Future Value of an Ordinary Annuity,o 7n" t(e future value of an or"inary annuity, multiply t(e amount of t(e annuity &y t(e future value of an or"inary annuity fa)tor.6-20Future Value of an Ordinary Annuity.e plan to invest $2,+00 at t(e en" of ea)( of t(e ne?t 10 years..e )an earn #%, )ompoun"e" interest annually, on all investe" fun"s..(at !ill &e t(e fun" &alan)e at t(e en" of 10 years