Professional Documents
Culture Documents
Chapter 6
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright2013byTheMcGrawHillCompanies,Inc.Allrightsreserved.
6-2
Simple Interest
Interest amount = P i n
Assume you invest $1,000 at 6%
simple interest for 3 years.
You would earn $180 interest.
($1,000 .06 3 = $180)
(or $60 each year for 3 years)
6-3
Compound Interest
Assume we deposit $1,000 in a bank that
earns 6% interest compounded annually.
6-4
Compound Interest
6-5
6-6
FV = PV (1 + i)n
Future
Future
Value
Value
Amount
Amount
Invested
Invested at
at
the
the
Beginning
Beginning
of
of the
the
Period
Period
Interest
Interest
Rate
Rate
Number
Number
of
of
Compounding
Compounding
Periods
Periods
6-7
6-8
6-9
FV
(1 + i)
610
611
612
FV = PV (1 + i)
Future
Future
Value
Value
Present
Present
Value
Value
Number
Number
of
of Compounding
Compounding
Interest
Periods
Interest
Periods
Rate
Rate
613
614
615
616
Basic Annuities
An annuity is a
series
of equal periodic
payments.
$10,000
$10,000
$10,000
617
Ordinary Annuity
An annuity with payments at the end of the
period is known as an ordinary annuity.
Today
$10,000
$10,000
$10,000
$10,000
End of year 1
End of year 2
End of year 3
End of year 4
618
Annuity Due
An annuity with payments at the beginning of
the period is known as an annuity due.
Today
$10,000
$10,000
$10,000
$10,000
Beginning
of year 1
Beginning
of year 2
Beginning
of year 3
Beginning
of year 4
619
620
621
622
623
624
PV1
PV2
PV3
PV4
$10,000
$10,000
$10,000
$10,000
625
PV1
PV2
PV3
PV4
Total
Annuity
$ 10,000
10,000
10,000
10,000
PV of $1
Factor
0.90909
0.82645
0.75131
0.68301
3.16986
Present
Value
$ 9,090.90
8,264.50
7,513.10
6,830.10
$ 31,698.60
626
PV1
PV2
PV3
PV4
Total
Annuity
$ 10,000
10,000
10,000
10,000
PV of $1
Factor
0.90909
0.82645
0.75131
0.68301
3.16986
Present
Value
$ 9,090.90
8,264.50
7,513.10
6,830.10
$ 31,698.60
627
628
629
12/31/13
1
12/31/14
2
$12,500
$12,500
12/31/15
3
12/31/16
4
12/31/17
630
12/31/13
1
12/31/14
2
$12,500
$12,500
12/31/15
3
12/31/16
4
12/31/17
631
12/31/13
1
12/31/14
2
$12,500
$12,500
12/31/15
3
12/31/16
4
12/31/17
The number of
periods
632
633
Today
End of
Year 1
End of
Year 2
End of
Year 3
End of
Year 4
634
Long-term
Leases
Pension
Obligations
635
636
Valuation of Long-term
On Bonds
June 30, 2013, Ebsen
Calculate the Present
Value of the Lump-sum
Maturity Payment (Face
Value)
Calculate the Present
Value of the Annuity
Payments (Interest)
637
Certain long-term
leases require the
recording of an
asset and
corresponding
liability at the
present value of
future lease
payments.
638
639
640
641
642
End of Chapter 6