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Fall 2010_Section Problem Set 8 (Chap 9)

# Fall 2010_Section Problem Set 8 (Chap 9) - AEM 2210 Section...

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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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o 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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Fall 2010_Section Problem Set 8 (Chap 9) - AEM 2210 Section...

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