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Unformatted text preview: TVM1 TVM Module TIME VALUE OF MONEY MODULE OBJECTIVES After careful study of this module, students will be able to: 1. Understand simple interest and compound interest. 2. Compute and use the future value of a single sum. 3. Compute and use the present value of a single sum. 4. Compute and use the future value of an ordinary annuity. 5. Compute and use the future value of an annuity due. 6. Compute and use the present value of an ordinary annuity. 7. Compute and use the present value of annuity due. 8. Compute and use the present value of a deferred ordinary annuity. 9. Explain the conceptual issues regarding the use of present value in financial reporting. TVM2 SYNOPSIS Symbols Used 1. Symbols used in all calculations are: p = principal sum (present value) p = present value of 1 discounted at interest rate i for n periods n,i n = number of time periods used when solving for a single sum; number of payments used when solving for an annuity i = interest rate for each of the stated time periods (annual stated rate divided by the number of compounding periods) f = future value of a single sum at compound interest rate i for n periods C = amount of each cash flow f = future value of a single sum of 1 at compound interest rate i n,i for n periods F = future value of an ordinary annuity of a series of cash flows 0 of any amount F = future value of an ordinary annuity of a series of n cash flows 0 n,i of 1 each at interest rate i F = future value of an annuity due of a series of cash flows of any amount d F = future value of an annuity due of a series of n cash flows of 1 each at d n,i interest rate i P = present value of an ordinary annuity of a series of cash flows 0 of any amount P = present value of an ordinary annuity of a series of n cash 0 n,i flows of 1 each discounted at interest rate i P = present value of an annuity due of a series of cash flows d of any amount P = present value of an annuity due of a series of n cash flows d n,i of 1 each discounted at interest rate i P = present value of a deferred annuity of a series of cash flows deferred of any amount p = present value of a single sum of 1 for k periods of deferment k,i TVM3 Time Value of Money 2. Time value of money refers to the difference in worth between a dollar received or paid today and a dollar received or paid in the future. A dollar received today is worth more than a dollar received some time in the future because of interest. 3. Interest , defined as the cost for the use of money over time, is an expense to the borrower or revenue to the lender. In other words, interest is the time value of money in quantitative (dollar) terms. 4. Discounting is the method of converting a future dollar amount into its present dollar value....
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 Spring '11
 SMITH

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