# 3311Ch06 - Sommers ACCT3311 CHAPTER6 TimeValueofMoney...

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Sommers–ACCT 3311 1 CHAPTER 6 Time Value of Money 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 )

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Sommers–ACCT 3311 2 Compound Interest Original balance 1,000.00 \$ First year interest (\$1,000.00 × 6%) 60.00 Balance, end of year 1 1,060.00 Balance, beginning of year 2 1,060.00 Second year interest (\$1,060.00 × 6%) 63.60 Balance, end of year 2 1,123.60 Balance, beginning of year 3 1,123.60 Third year interest (\$1,123.60 × 6%) 67.42 Balance, end of year 3 1,191.02 Future Value of a Single Amount The future value of a single amount is the amount of money that a dollar will grow to at some point in the future. Assume we deposit \$1,000 for three years that earns 6% interest compounded annually. \$1,000.00 × 1.06 = \$1,060.00 \$1,000.00 × 1.06 \$1,060.00 and \$1,060.00×1.06 = \$1,123.60 and \$1,123.60×1.06 = \$1,191.02
Sommers–ACCT 3311 3 Future Value of a Single Amount Writing in a more efficient way, we can say . . . . \$1,191.02 = \$1,000 × [1.06] 3 FV = PV (1 + i ) n Number of Compounding Periods Future Value Amount Invested at the Beginning of the Period Interest Rate Using the Future Value of \$1 Table, we find the factor for 6% and 3 periods is 1.19102. Future Value of a Single Amount So, we can solve our problem like this. . .

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## This note was uploaded on 09/30/2010 for the course ACCT 3311 taught by Professor Gregsommers during the Fall '10 term at Southern Methodist.

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3311Ch06 - Sommers ACCT3311 CHAPTER6 TimeValueofMoney...

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