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Present value 2

Present value 2 - CHAPTER 6 Accounting and the Time Value...

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6-1 CHAPTER 6 Accounting and the Time Value of Money

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6-2 LECTURE OUTLINE This chapter can be covered in two to three class sessions. Most students have had previous exposure to single sum problems and ordinary annuities, but annuities due and deferred annuities will be new material for most students. The first class session can be used for lecture on the chapter concepts, and for discussing Illustration 6-5. TEACHING TIP Illustration 6-5 can be distributed to students as a self-contained 6-page handout. It uses 10 sample problems to demonstrate a 5-step solution method that can be used to solve any of the problems discussed in the chapter. Some students with prior background in math or finance courses may prefer to use exponential formulas rather than interest tables to find interest factors. Other students with sophisticated calculators may prefer to "let the calculator do the work." Remind students that whether they use interest tables, exponential formulas, or internal calculator routines, they cannot solve problems correctly unless they can correctly identify the type of problem, the number of periods, and the interest rate involved. Students often have no difficulty with problems that are worded. "At 6%, what is the present value of an annuity due of 20 payments of \$10,000 each?" but they may not know how to proceed if the same problem is worded: "What amount must be deposited now in an account paying 12% if it is desired to make 20 semiannual withdrawals of \$10,000 each beginning today?" Emphasize to students the importance of properly setting up the problem. The second and third class sessions can be used for determining solutions to more complex problems, including deferred annuities, bond valuation and other accounting applications. Some of the journal entries for the accounting applications can be discussed briefly. The following lecture outline is appropriate for this chapter. A. Introduction. 1. Discuss the importance of the time value of money. 2. Describe accounting applications of time value concepts: bonds, pensions, leases, long-term notes. 3. Describe personal applications of time value concepts: purchasing a home, planning for retirement, evaluating alternative investments.
6-3 B. Nature of Interest. 1. Interest is payment for the use of money. It is the excess cash received or repaid over and above the principal (amount lent or borrowed). 2. Interest rates are generally stated on an annual basis unless indicated otherwise. 3. Choosing an appropriate interest rate: a. is not always obvious. b. three components of interest: (1) pure rate of interest (2%–4%). (2) credit risk rate of interest (0%–5%). (3) expected inflation rate of interest (0%–?%). C. Simple Interest. TEACHING TIP Illustration 6-1 can be used to distinguish between simple interest and compound interest.

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