ACCT 2102 Week 2: 8/31 - 9/4
ACCT 2102 Week 2: 8/31 - 9/4 ACCT 2102
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This 3 page Class Notes was uploaded by Libby Fleck on Monday September 7, 2015. The Class Notes belongs to ACCT 2102 at Georgia State University taught by Kathleen S. Partridge (P) in Fall 2015. Since its upload, it has received 44 views. For similar materials see PRIN OF ACCT II in Accounting at Georgia State University.
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Date Created: 09/07/15
Week 2 Chapter 11 The Time Value of Money Learning Objectives L01 Explain the riskreturn relationship L02 Use the time value of money concepts to solve present and future value problems Annuities Future Value of an Annuity Present Value of an Annuity Identifying PV and FV Annuity Situations Week 2 Chapter 11 The Time Value of Money Learning Objectives L01 Explain the riskreturn relationship L02 Use the time value of money concepts to solve present and future value problems Annuities o The PV and FV problems thus far have involved one lump sum amount either now or in the future 0 Frequently in business multiple payments will be made over time rather than as a single lump sum 0 This stream of equal payments at equal intervals is called an annuity Future Value of an Annuity o What is a series of payments going to be worth at some point in the future 0 Example If we invest 100 every month for 4 years and earn 12 percent interest annually how much money will we have in 4 years 0 ANN 100 PV 0 r 12 c 12 rc1 n 48 0 factor 61226 100 FVA 612260 0 Example Dani is going to deposit 1000 at the end of the year for the next 3 years in an account earning 8 compounded annually How much will be in the account at the end of 3 years I End of year 1 rc 8 n 2 1000 x 11664 116640 I End of year 2 rc 8 n 1 1000 x 108 1080 I End of year 3 rc 8 n 0 1000 x 1 1000 I Sum of 3 years 116640 1080 1000 324640 0 There is a table that makes this calculation easier With the FV of annuity table all you need to know is the number of payments and the interest rate I rc 8 n 3 Table value 324640 I 1000 x 324640 324640 Present Value of an Annuity o How much must be received today to generate a series of equal payments in the future 0 Example You want to buy a flat screen TV and pay for it over the next 18 months The maximum that you can afford per month is 100 You can obtain a store loan for 12 interest rate for 18 months What is the maximum that you can spend on the TV 0 PVA FV 0 r 12 rc 1 c 12 n 18 ANN 100 0 Factor 163983100 1639 Identifying PV and FV Annuity Situations 0 Present Value 0 Any time you make a purchase and pay off the loan with a series of equally spaced equal payments it involves a PV of an Annuity problem I Examples Mortgages and car loans 0 Dave is hoping to retire in the near future Dave thinks he can live comfortably on 75000 a year Dave expects to live 40 years after he retires and conservatively plans for his investments to grow at a 5 rate per year compounded annually How much must Dave have saved by the time he retires to ensure his desired level of annual income I Since the big pile of money comes before the payment stream this is a PV problem 0 Future Value 0 Jane has deposited 8000 a year into her IRA at the end of each year for the last 20 years Her IRA account pays 8 compounded annually How much is in her IRA today I Since the big pile of money comes after the payment stream this is a FV problem Example 0 Bill wants to buy a used car for 7500 He can get a 15 year loan at 12 interest What are his monthly car payments going to be 0 PV7500 r12 c12 n18 Ann rc12121 n18 PVA factor 1639827 To get the payments we DIVIDE the PV by the PVA factor Monthly Payment annuity 75001639827 4573 OOOO
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