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ACC241: Time Value of Money
Name: Adam Newman
Team:____________
Time Value of Money – Some examples –
Ignore income taxes on all problems
Please complete the below and bring to class on Wednesday, December 2nd.
You should read
the Appendix 3, Time Value of Money, and the summary starting on page 2 of this exercise.
1.
If $10,000 is deposited today in an account earning 5%, how much will be in the account after 3
years? After 10 years?
What can you conclude about the effect of time?
A
fter 3 years: 11576.25
After 10 years: 16288.95
2.
How much would you pay today for a savings certificate that returns $16,289 in 10 years if you want
to earn a 5% rate of return?
A 10% rate of return?
What can you conclude about the effect of
interest rate?
5% return: $10,000
10% return: 6287.5
3.
Your uncle sets up a trust fund for you, depositing $10,000 in an account that earns 6% compounded
annually.
You cannot touch the money until your uncle dies.
If he dies 8 years from now, how much
will be in your trust fund?
If he dies 16 years from now, will there be twice as much money?
In 8 years : 15938.48
In 16 Years: no, 25,403.52
4.
You won the Lottery!
The prize is $5,000,000, to be paid in equal installments of $250,000 over 20
years.
Alternatively, you can settle for an immediate cash payment of $3,000,000.
If you assume
that you could earn an average 6% interest (in safe investments) over the next 20 years, which
payment alternative is the better deal? (ignore income taxes)
3,000,000 * 1.06^20= 9,621,406.42
250,000*36.786= 9,196,500
The lump sum is a better deal
5.
If Kinko’s buys another copy machine for $20,000, it will generate net annual cash flows of $5,000 a
year for 5 years, after which it will be worthless.
If their
discount rate
is 10%, should they invest in
the copier? (ignore income taxes)
5,000*6.105 = 30,525 yes they should invest
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View Full Document ACC241: Time Value of Money
Name: Adam Newman
Team:____________
The
time value of money
means that people prefer a payment at the present time rather than in the future
because of the interest factor. The amount can be invested and the resulting accumulation will be larger than
the amount received in the future.
•
Reflects the impact that interest has on financial decisions
•
Has implications for many accounting valuation decisions
Future value is the amount to which your initial investment will grow, given the time invested and the interest
rate.
a.
Simple interest
is interest on the invested amount only.
b.
Compound interest
is interest on the invested amount plus interest on
the
previous
interest earned but not withdrawn.
Future Value of a Single Amount
Knowing the principal “
p
” which we have
now,
we want to
calculate
what that amount that will be
accumulated in the
future
, given the rate of interest “i” it will earn, and the number of periods “n” over
which it will earn that interest
How do we calculate the future amount?
•
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This note was uploaded on 01/07/2012 for the course ACC 241 taught by Professor Karengeiger during the Fall '08 term at ASU.
 Fall '08
 KarenGeiger
 Taxes

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