_05_APP_3_MOODLE_PowerPoint_Slides_ACC_210_--_Day_1_TVM_A3

# _05_APP_3_MOODLE_PowerPoint_Slides_ACC_210_--_Day_1_TVM_A3...

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ACC210 – Spring 2011 “Time Value of Money” Appendix 3 Christopher T. McKittrick CPA, MBA, CFE

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Appendix 3 – Objectives Describe the difference between simple and compound interest Describe the meaning of the future value of an amount (FV) and the future value of an ordinary annuity (FVA) Describe the meaning of the present value of an amount (PV) and the present value of an ordinary annuity (PVA) Describe the relationship between the present value of an amount (PV) and the future value of an amount (FV) Calculate the future value and present value of an investment
The Rule of 72 A rule that states in order to find the number of years required to double your money at a given interest rate, you divide the compound interest rate into 72. The result is the approximate number of years that it will take for your investment to double . For example: \$1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into \$2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2). Albert Einstein is often credited with discovering the compound interest Rule of 72. Referring to compound interest, Albert Einstein is quoted as saying: "It is the greatest mathematical discovery of all time“.

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Time Value Of Money “Definitons\” A dollar on hand today is worth more than a dollar to be received in the future The dollar on hand today can be invested to earn interest to yield more than a dollar in the future . This, of course, depends upon the rate of return or interest rate which can be earned on the investment. TVM has applications in many areas of Corporate Finance including: Capital Budgeting Stock Valuation. Bond Valuation For example, a bond typically pays interest periodically until maturity at which time the face value of the bond is also repaid.
Financing Decisions Investment by owners Loans from creditors Business capital (Funding)

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Long-Term Investing/Financing Decisions Focus Cash Flows Time Value of Money
Time Value of Money Long term decisions consider the ability

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## _05_APP_3_MOODLE_PowerPoint_Slides_ACC_210_--_Day_1_TVM_A3...

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