AEM 2210
Section Problem Set 8
Covering Material from Chapter 9
Name:
Section:
Material Review
Present and Future Value Calculations are include four variables
o
a present value (how much an amount is worth today)
o
a future value (how much an amount is worth in the future)
o
the interest rate (denoted by an “
i”
or “
r
”)
o
the time period (typically denoted by an “
N
”)
Present Value of a single amount:
how much a future amount is worth today
o
Present Value problems:
a future value, interest rate and time period are
given; you must find present value
o
Present Value (single amount) Equation:
PV=Future Value
(1+
i
)
N
o
Example:
You want to invest money in a fund today that will generate
$30,000 in five years.
The interest rate is 10% and is compounded annually.
How much do you have to invest today?
N=5, i=0.10, FV=$30,000
Answer (using factor):
PV=30,000 x .620921 = $18,627.64
Answer (using PV equation):
PV= 30,000
=$18,627.64
(1+.10)
5
Future Value of a single amount:
how must an amount today is worth at a future date
o
Future Value problems: a present payment or deposit amount, interest rate and
time period are given; you must find future value
o
Future Value (single amount) equation:
FV=Present Value x (1+
i
)
N
o
Example:
You invest $5,000 in a fund with an 8% annual interest rate.
How
much will your investment be worth in 10 years?
N=10, i=0.08, PV = $5,000
Answer (using factor):
FV=$5,000 x 2.159 = 10,794.62
Answer (using FV equation):
FV= $5,000 x (1+.08)
10
= 10,794.62
Annuities – repeated equal payments
o
For now, use factor tables in the back of the textbook to solve present/future
value annuity problems
o
Present Value – what is the value today of stream of cash flows to be paid over
a certain time period?
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Future Value – What is the total value, at a future date, of a stream of cash
flows over a certain period?
Payroll
o
Unpaid salaries and benefits at the end of a period are recorded under accrued
liabilities or a separate account
o
It also typically includes FICA taxes, Medicare, Income Tax (federal, state and
local), and other deductions (i.e., retirement accounts)
o
Recording payroll:
Wage expense is debited, cash and all deductions from wages are
credited
The cash amount is equal to the difference between total wage expense
amount and the deductions
There is a separate entry for fringe benefits expense
Notes Payable
o
A note payable specifies terms related to the payback of borrowed money plus
interest
o
The longer the period of time related to the payback, the higher the interest
earned
o
To the lender of the money, interest is a revenue
o
To the borrower, interest is an expense
o
Interest =
Principal (the amount borrowed) x Interest Rate x Time Period
o
To determine interest expenses, revenues etc., use the present and future value
equations and factors
Working Capital – the difference between current assets and current liabilities
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 Spring '07
 LITTLE,J.
 Time Value Of Money, Future Value, Interest, Federal Insurance Contributions Act tax

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