Time Value of Money, Part 2 Future Value aueof a $1 (Single Sum) Learning Outcomes. Future Value

Transcription

1 Tme Value of Money, Part 2 Future Value aueof a $1 (Sngle Sum) Intermedate Accountng I Dr. Chula Kng 1 Learnng Outcomes The concept of future value Future value of a sngle sum How to set up the problem How to use the tables to solve the problem. 2 Future Value Refers to the amount of money to whch an nvestment wll grow over a fnte perod of tme at a gven nterest rate. The cash value of an nvestment at a partcular tme n the future. 3 1

2 Compoundng The addton of nterest on prncpal/nterest over tme from the present to the future PV amount x(1 + ) n 100 x1.10 = 110 x1.10 = The number of tmes durng the year that compoundng takes place 10% compounded annually 10% once per year 10% compounded sem annually 5% every sx months. 4 Future Value Sngle Sum If I nvest $1 today, how much wll I have at some pont n the future assumng some rate of return (nterest)? n +1? 5 : Future Value Sngle Sum Today, I nvest $100 n a savngs account earnng 10% compounded annually. How much wll I have at the end of three years? 6 2

3 A Pctoral Representaton x1.10 => x1.10 => x1.10 => Table Soluton Tme value of money tables 1: Future value of a sngle sum 2: Present value of a sngle sum 3: Future value of an ordnary annuty 4: Present value of an ordnary annuty 5: Future value of an annuty due 6: Present value of an annuty due 8 Readng the Table Select the correct table Select the column correspondng to the nterest rate per perod Read down that column to the row that corresponds to the number of perods Take the resultant factor, and multply t by the present value amount The result s the future value! 9 3

4 Interest rate 10%, # perods = 3 10 FV of Sngle Sum FV of a sngle sum, =10%, n= x 100 = You nvest $ n a fund that earns 8% compounded annually. How much wll you have at the end of three years? Future value of a sngle sum, = 8%, n =

5 13 You nvest $ n a fund that earns 8% compounded annually. How much wll you have at the end of three years? Future value of a sngle sum, = 8%, n = 3 x = $12, You nvest $ n a fund that earns 8% compounded sem annually. How much wll you have at the end of three years? Future value of a sngle sum, = 4%, n =

6 16 You nvest $ n a fund that earns 8% compounded sem annually. How much wll you have at the end of three years? Future value of a sngle sum, = 4%, n = 6 x = $12, More than One Sngle Sum Today, you make an nvestment of $ n a fund that earns 8% compounded annually. A year from today, you make an addtonal nvestment of $20,000 n the same fund. How much wll you have at the end of three years? 20,000 FV of a sngle sum, = 8%, n = 2 FV of a sngle sum, = 8%, n =

7 19 More than One Sngle Sum Today, you make an nvestment of $ n a fund that earns 8% compounded annually. A year from today, you make an addtonal nvestment of $20,000 n the same fund. How much wll you have at the end of three years? 20,000 FV of a sngle sum, = 8%, n = 2 20,000 x = 23,328 FV of a sngle sum, = 8%, n = 3 x = 12,597 35, Concludng Comments Part 3: Present Value of $1 (Sngle Sum) Part 4: Future Value of an Annuty of $1 Ordnary Annuty Annuty Due Part 5: Present Value of an Annuty of $1 Ordnary Annuty Annuty Due 21 7