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Present and Future Value Concepts
• Value of assets and liabilities change over time. • Change is due to interest. • Example: Cash in savings earns interest. • Present and future value computations help us measure interest over time. • Present value used to determine value of future-day assets today. • Future value used to determine value of present-day assets at a future date.
Learning Objective C1: Describe the earning of interest and the concepts of present and future values. 1-2
Present Value of a Single Amount
Exhib for One Period it B.2 Formula to compute present value of a single amount: • p = present value (PV) • f = future value (FV) • i = interest rate per period • n = number of periods
Illustration of PV of a Single Amount for One Period:
Exhib for Multiple Periods it B.2 Formula to compute present value of a single amount: • p = present value (PV) • f = future value (FV) • i = interest rate per period • n = number of periods
Illustration of PV of a Single Amount for Multiple Periods:
Compute PV of a Single Amount Exhib it B.3 • Present value table helps with computations. • Provides present values (factors) for variety of interest rates and periods. • Present value assumes that the future value equals 1. • Present value of 1 table – Table B.1 • Formula to compute present value of a single amount: • p = present value (PV) • i = interest rate per period • n = number of periods
Exhib for One Period it B.4 Formula to compute future value of a single amount: • p = present value (PV) • f = future value (FV) • i = interest rate per period • n = number of periods
Illustration of FV of a Single Amount for One Period:
Learning Objective P2: Apply future value concepts to a single amount by using interest tables. 1-7
Future Value of a Single Amount
Exhib for Multiple Periods it B.4 Formula to compute future value of a single amount: • p = present value (PV) • f = future value (FV) • i = interest rate per period • n = number of periods
Illustration of FV of a Single Amount for Multiple Periods:
Learning Objective P2: Apply future value concepts to a single amount by using interest tables. 1-8
Using Present Table to Compute
Exhib FV of a Single Amount it B.5 • Future value table helps with computations. • Provides future values (factors) for variety of interest rates and periods. • Future value assumes that the present value equals 1. • Future value of 1 table - Table B.2. • Formula to compute present value of a single amount: • f = future value (FV) • i = interest rate per period • n = number of periods
• Annuity – series of equal payments occurring at equal intervals. • Ordinary annuity – equal end-of-period payments at equal intervals. • Can compute PV of ordinary annuity using Table B.1. • Direct way use PV of annuity table – Table B.3. • Example of using Table B.1 vs Table B.3: