Financial accounting IFRS 4 kieoso appe PPT

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso

Appendix E

Time Value of Money


Appendix Preview

Would you rather receive NT$1,000 today or a year from
now?
You should prefer to receive the NT$1,000 today because
you can invest the NT$1,000 and earn interest on it. As a
result, you will have more than NT$1,000 a year from
now. What this example illustrates is the concept of the
time value of money. Everyone prefers to receive money
today rather than in the future because of the interest
factor.
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Appendix Outline

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Learning Objective 1
Compute interest and future values.

LO 1

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Nature of Interest
• Payment for the use of money.
• Difference between the amount borrowed or
invested (principal) and the amount repaid or
collected.
• Three elements determine the amount of interest:
1. Principal (p): The original amount borrowed or invested.
2. Interest Rate (i): Annual percentage of the principal.
3. Time (n): The number of periods that the principal is borrowed or
invested.

LO 1

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Nature of Interest
Simple Interest
Interest is computed on the principal (p) only.
Assume: You borrowed NT$5,000 for 2 years at a simple interest rate of
6% annually.
Calculate: Annual interest.

LO 1

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Nature of Interest
Compound Interest
• Computes interest on
• the principal and
• any interest earned that has not been paid or
withdrawn.

• Business situations use compound interest when
interest is not paid periodically during the time of
borrowing.

LO 1

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Compound Interest
Assume: You deposit €1,000 in Bank Two, where it will earn simple
interest of 9% per year, and you deposit another €1,000 in Citizens
Bank, where it will earn compound interest of 9% per year
compounded annually. Also assume that in both cases you will not
withdraw any cash until three years from the date of deposit.

LO 1

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Future Value Concepts
Future value of a single amount
•

LO 1

Value at a future date of a given amount invested, assuming compound
interest

FV

= future value of a single amount

p

= principal (or present value; the value today)

i

= interest rate for one period

n

= number of periods

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Future Value Concepts
Future value of a single amount
• Value at a future date of a given amount invested, assuming
compound interest

FV = future value of a single amount

LO 1

p

= principal (or present value; the value today)

i

= interest rate for one period

n

= number of periods

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Future value of a single amount
Assume: You deposit €1,000 for three years. The annual interest
rate is 9%.
Calculate: The future value after three years.
FV =

LO 1

p

ì

(1 + i)n

=

1,000

ì

(1 + .09)3

=

1,000

ì

1.29503

=

1,295.03

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Future value of a single amount
Assume: Again, you deposit €1,000 for three years. The annual
interest rate is 9%.
Calculate: The future value after three years using a table.

What factor do we use?
Present Value x
€1,000
LO 1

x

Factor

=

1.29503 =

Future Value
€1,295.03

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Future value of a single amount
Assume: John and Mary Rich invested £20,000 in a savings account
paying 6% interest at the time their son, Mike, was born. The money is
to be used by Mike for his college education. On his 18th birthday, Mike
withdraws the money from his savings account.
Calculate: How much did Mike withdraw from his account?

Which table do we use?
LO 1

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Future value of a single amount

…

…

…

…

…

…

…

…

…

…

What factor do we use?
Present Value x
£20,000
LO 1

Factor

=

x 2.85434 =

Future Value
£57,086.80

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Future value of an annuity
Assume: You invest HK$2,000 at the end of each year for three
years at 5% interest compounded annually.
Calculate: The future value after three years using a table.

When the periodic payments (or receipts) are the same in each period, the
future value can be computed by using a Future Value of an Annuity of 1 table
(Table 2).
Continues on next slide
LO 1

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Future value of an annuity

LO 1

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Future value of an annuity
Assume: John and Char Lewis’ daughter, Debra, has just started high
school. They decide to start a college fund for her and will invest £2,500
in a savings account at the end of each year she is in high school (4
payments total). The account will earn 6% interest compounded
annually.
Calculate: How much will be in the college fund at the time Debra
graduates from high school?

Continues on next slide
LO 1

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Future value of an annuity

What factor do we use?

LO 1

Payment

x

Factor

=

£2,500

x 4.37462 =

Future Value
£10.936.55

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Learning Objective 2
Compute present values.

LO 2

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Present Value Concepts
Present value of a single amount
The present value is the value now of a given amount to
be paid or received in the future, assuming compound
interest.
Present value variables:
1. Future Value (FV): Dollar amount to be received
2. Interest Rate (i): Called the discount rate
3. Time (n): length of time until amount is received (number of periods).

LO 2

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Present Value Concepts
Present value of a single amount:
Value now of a given future amount invested, assuming compound interest.

LO 2

PV

= present value

FV

= the dollar amount to be received in the future

i

= interest rate for one period

n

= number of periods

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Present value of a single amount
Assume: You make a deposit and want a 10% rate of return. The
future value of the deposit in one year is €1,000.
Calculate: The present value.
PV =

LO 2

FV

ữ

(1 + i)n

=

1,000

ữ

(1 + .10)1

=

1,000

ữ

1.10

=

909.09

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Present value of a single amount
Assume: Again, you make a deposit and want a 10% rate of
return. The future value of the deposit in one year is €1,000.
Calculate: The present value using a table.

What factor do we use?

LO 2

Future Value

x

€1,000

x

Factor

=

0.90909 =

Present Value
€909.09

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Present value of a single amount
Assume: You make a deposit and want a 10% rate of return. The
future value of the deposit in two years is €1,000.
Calculate: The present value.
PV =

LO 2

FV

ữ

(1 + i)n

=

1,000

ữ

(1 + .10)2

=

1,000

ữ

1.10

=

826.45

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Present value of a single amount
Assume: Again, you make a deposit and want a 10% rate of
return. The future value of the deposit in two years is €1,000.
Calculate: The present value using a table.

What factor do we use?

LO 2

Future Value

x

€1,000

x

Factor

=

0.82645 =

Present Value
€826.45

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