APPENDIX E
TIME VALUE OF MONEY
CHAPTER LEARNING OBJECTIVES
1. Compute interest and future values. Simple interest is computed on the principal only,
while compound interest is computed on the principal and any interest earned that has not
been withdrawn.
To solve for future value of a single amount, prepare a time diagram of the problem. Identify
the principal amount, the number of compounding periods, and the interest rate. Using the
future value of 1 table, multiply the principal amount by the future value factor specified at the
intersection of the number of periods and the interest rate.
Solve for future value of an annuity, prepare a time diagram of the problem. Identify the
amount of the periodic payments (receipts), the number of payments (receipts), and the
interest rate. Using the future value of an annuity of 1 table, multiply the amount of the
payments by the future value factor specified at the intersection of the number of payments
and the interest rate.
2. Compute present values. The following three variables are fundamental to solving present
value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the
discount rate).
To solve for present value of a single amount, prepare a time diagram of the problem. Identify
the future amount, the number of discounting periods, and the discount (interest) rate. Using
the present value of a single amount table, multiply the future amount by the present value
factor specified at the intersection of the number of periods and the discount rate.
To solve for present value of an annuity, prepare a time diagram of the problem. Identify the
amount of future periodic receipts or payments (annuities), the number of payments
(receipts), and the discount (interest) rate. Using the present value of an annuity of 1 table,
multiply the amount of the annuity by the present value factor specified at the intersection of
the number of payments and the interest rate.
To compute the present value of notes and bonds, determine the present value of the
principal amount and the present value of the interest payments. Multiply the principal amount
(a single future amount) by the present value factor (from the present value of 1 table)
intersecting at the number of periods (number of interest payments) and the discount rate. To
determine the present value of the series of interest payments, multiply the amount of the
interest payment by the present value factor (from the present value of an annuity of 1 table)
intersecting at the number of periods (number of interest payments) and the discount rate.
Add the present value of the principal amount to the present value of the interest payments to
arrive at the present value of the note or bond.
3. Use a financial calculator to solve time value of money problems. Financial calculators
can be used to solve the same and additional problems as those solved with time value of
money tables. Enter into the financial calculator the amounts for all of the known elements of
a time value of money problem (periods, interest rate, payments, future or present value), and
it solves for the unknown element. Particularly useful situations involve interest rates and
compounding periods not presented in the tables.
TIME VALUE OF MONEY
CHAPTER LEARNING OBJECTIVES
1. Compute interest and future values. Simple interest is computed on the principal only,
while compound interest is computed on the principal and any interest earned that has not
been withdrawn.
To solve for future value of a single amount, prepare a time diagram of the problem. Identify
the principal amount, the number of compounding periods, and the interest rate. Using the
future value of 1 table, multiply the principal amount by the future value factor specified at the
intersection of the number of periods and the interest rate.
Solve for future value of an annuity, prepare a time diagram of the problem. Identify the
amount of the periodic payments (receipts), the number of payments (receipts), and the
interest rate. Using the future value of an annuity of 1 table, multiply the amount of the
payments by the future value factor specified at the intersection of the number of payments
and the interest rate.
2. Compute present values. The following three variables are fundamental to solving present
value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the
discount rate).
To solve for present value of a single amount, prepare a time diagram of the problem. Identify
the future amount, the number of discounting periods, and the discount (interest) rate. Using
the present value of a single amount table, multiply the future amount by the present value
factor specified at the intersection of the number of periods and the discount rate.
To solve for present value of an annuity, prepare a time diagram of the problem. Identify the
amount of future periodic receipts or payments (annuities), the number of payments
(receipts), and the discount (interest) rate. Using the present value of an annuity of 1 table,
multiply the amount of the annuity by the present value factor specified at the intersection of
the number of payments and the interest rate.
To compute the present value of notes and bonds, determine the present value of the
principal amount and the present value of the interest payments. Multiply the principal amount
(a single future amount) by the present value factor (from the present value of 1 table)
intersecting at the number of periods (number of interest payments) and the discount rate. To
determine the present value of the series of interest payments, multiply the amount of the
interest payment by the present value factor (from the present value of an annuity of 1 table)
intersecting at the number of periods (number of interest payments) and the discount rate.
Add the present value of the principal amount to the present value of the interest payments to
arrive at the present value of the note or bond.
3. Use a financial calculator to solve time value of money problems. Financial calculators
can be used to solve the same and additional problems as those solved with time value of
money tables. Enter into the financial calculator the amounts for all of the known elements of
a time value of money problem (periods, interest rate, payments, future or present value), and
it solves for the unknown element. Particularly useful situations involve interest rates and
compounding periods not presented in the tables.
