Pratt_7e_Chapter11 - 1 Ch 11: Long-Term Liabilities Ch...

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2 Ch 11: Long-Term Liabilities Ch 11: Long-Term Liabilities Notes, Bonds, and Leases Notes, Bonds, and Leases
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3 Basic Time Value Concepts Basic Time Value Concepts In accounting (and finance), the term indicates that a dollar received today is worth more than a dollar promised at some time in the future. Time Value of Money You can invest today’s money to earn interest. Why?
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4 Basic Time Value Concepts Basic Time Value Concepts Why do you need this concept? 1. Business decision Values of alternatives should be measured on the same footing 2. Incorporate market information into accounting measures.
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5 Ch 11: Long-Term Liabilities Ch 11: Long-Term Liabilities Notes, Bonds, and Leases Notes, Bonds, and Leases Long-term liabilities are recorded at the present value of the future cash flows. Three factors determine the present value: Principal - The amount borrowed or invested number of periods of discounting Compounding Period Interest Rate - annual rate divided by the number of compounding periods per year. Number of Periods - number of years x the number of compounding periods per year.
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6 Interest Rates and Frequency Interest Rates and Frequency Compounding Compounding Frequency of  Compounding Interest rate per compounding Number of compounding periods Assumed interest rate per year: 12% Annual 12% One (1) Semi-annual 6% Two (2) Monthly 1% Twelve (12) Quarterly 3% Four (4)
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7 1.Present Value of a Single Sum 1.Present Value of a Single Sum Unknown Present Value Multiply the present value factor by the future value.
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8 Present Value of a Single Sum Present Value of a Single Sum Itzak Perlman needs $20,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? 0 1 2 3 4 5 6 Present Value? What table do we use? Future Value $20,000
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9 Present Value of a Single Sum Present Value of a Single Sum Number of Discount Rate Periods 4% 6% 8% 10% 12% 2 .92456 .89000 .85734 .82645 .79719 4 .85480 .79209 .73503 .68301 .63552 6 .79031 .70496 .63017 .56447 .50663 8 .73069 .62741 .54027 .46651 .40388 Table 4 (Pg.684) Table 4 (Pg.684) What factor do we use?
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10 Present Value of a Single Sum Present Value of a Single Sum Number of Discount Rate Periods 4% 6% 8% 10% 12% 2 .92456 .89000 .85734 .82645 .79719 4 .85480 .79209 .73503 .68301 .63552 6 .79031 .70496 .63017 .56447 .50663 8 .73069 .62741 .54027 .46651 .40388 Table 4 Table 4 $20,000 x .63552 = $12,710 Future Value Factor Present Value
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2. Present Value of an Ordinary Annuity 2. Present Value of an Ordinary Annuity Present value of a series of equal amounts to be withdrawn or received at equal intervals. Periodic rents occur at the end of the period. 0 1
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Pratt_7e_Chapter11 - 1 Ch 11: Long-Term Liabilities Ch...

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