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Acc011_02_Time_Value_of_Money

# Acc011_02_Time_Value_of_Money - Time Value of Money...

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Time Value of Money

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Accounting Applications Notes Leases Pensions Derivatives
Assertion One dollar today is worth more than one dollar tommorrow.

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Why? Because it can earn interest from today until tommorrow.
Terminology Principal-amount borrowed or invested Rate-percentage, normally expressed on an annual basis Time-the number of years, or fraction of year that principal is outstanding

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Which would you rather have? •\$1000 today or \$1000 a year from today. •\$1000 today or \$1010 a year from today. •\$1000 today or \$1050 a year from today. •\$1000 today or \$1100 a year from today.
•This is where the concept of present value or value today comes in. When trying to decide which cashflow you would rather have, you must evaluate them at the same point in time.

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•Lets take our \$1000 today. How much will it be worth 1 year from today. •Assume that we can invest in a 1 year Treasury Note paying 7% interest.
In 1 year we will have the \$1000 + interest, which can be calculated as follows: 1000 + (1000 X .07) = 1070 this can be simplified to

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which leads to a generalized formula Present Value ( 1 + interest rate)= Future Value
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