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
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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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