APPENDIX A
STUDY OBJECTIVES
1.
DISTINGUISH BETWEEN SIMPLE AND COMPOUND
INTEREST.
2.
SOLVE FOR FUTURE VALUE OF A SINGLE AMOUNT.
3.
SOLVE FOR FUTURE VALUE OF AN ANNUITY.
4.
IDENTIFY THE VARIABLES FUNDAMENTAL TO
SOLVING PRESENT VALUE PROBLEMS.
5.
SOLVE FOR PRESENT VALUE A OF SINGLE
AMOUNT.
6.
SOLVE FOR PRESENT VALUE OF AN ANNUITY.
7.
COMPUTE THE PRESENT VALUE IN CAPITAL
BUDGETING SITUATIONS.
A-1

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LECTURE OUTLINE
A.
Nature of Interest.
1. Interest is payment for the use of another person's money.
It is the difference bet-ween
the amount borrowed or invested (called the principal) and the amount repaid or col-
lected.
2. The amount of interest involved in any financing transaction is based on:
a.
Principal (
p
):
The original amount borrowed or invested,
b.
Interest Rate (
i
):
An annual percentage of the principal,
c.
Time (
n
):
The number of years that the principal is borrowed or invested.
3. Simple interest is computed on the principal amount only.
Use
ILLUSTRATION A-1
to distinguish between simple interest and com-
pound interest.
4. Compound interest is computed on principal and on any interest earned that has not
been paid or withdrawn.
It is the return on the principal for two or more time periods.
B.
Future Value of a Single Amount.
1. The future value of a single amount is the value at a future date of a given amount in-
vested assuming compound interest.
2. The future value of a single amount can be computed using the following formula:
FV
=
p
×
(1 +
i
)
n
p
= principal;
i
= interest rate;
n
= number of periods.

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