This preview shows pages 1–2. Sign up to view the full content.
358
Appendix B
Future Value and Present Value
Because you can earn interest on your money over time, the value of invested funds is greater in the
future than it is today. This refers to the
time value of money
. To determine what a
future value
will be,
you simply apply an interest rate to the amount of your investment and calculate the amount of interest.
Add this result to your original amount and the sum becomes the future value at the end of one interest
period. Repeat this process for additional interest periods, remembering to add in the interest each time.
Therefore, there are three factors involved in determining a future value: 1) the amount of the original
investment, 2) the length of time, and 3) the interest rate. Obviously the longer the time, the more
calculations are involved. Fortunately mathematical tables are available to ease your task. Review exhibit
B2 carefully. This is the table used to determine the future value of a single investment, again assuming
time and interest rate.
Instead of investing a single amount for a specific period, you might wish to invest multiple amounts over
time. This is an example of an
annuity type investment
. In other words, you invest identical amounts for
several years
what will the future value of these multiple investments be?
Of course, you could
calculate each individually and add the results, or you could consult mathematical tables which do the
multiple calculations for you. Review exhibit B4 carefully. This is the table used to determine a future
value of multiple investments, again assuming time and interest rate. This table is used to answer
questions like “If I start setting aside (investing) $500 each year for the next ten years, what will it be
worth, assuming I can invest this money at 8%?” Exhibit B4 shows the value 14.487 at the intersection
of 10 and 8%. Multiply this value by your annual investment ($500) and the result is $7,243.50.
Another way to look at present and future values is to begin with the future value and work backwards. In
other words, in order to have X amount sometime in the future, how much would one need to set aside
today? Again assumptions need to be made about the time and the interest rate (this is always true).
As with the preceding discussions, you could calculate the result manually, but the longer the period of
time the more calculations you would have to complete. Once again, mathematical tables are available to
use. Study exhibit B6 carefully.
Rather than determining the present value of a single amount, you may be interested in the
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Fall '09
 R.AMBROSE
 Financial Accounting

Click to edit the document details