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and Beta. Therefore, accountants rely on precise mathematical techniques to quantify the time value
of money. your chance
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21 Compound Interest and Present Value Analytics for Managerial Decision Making 4.1 Compound Interest
The starting point for understanding the time value of money is to develop an appreciation for
compound interest. “The most powerful force in the universe is compound interest.” The preceding
quote is often attributed to Albert Einstein, the same chap who unlocked many of the secrets of
nuclear energy. While it is not clear that he actually held compound interest in such high regard, it is
clear that understanding the forces of compound interest is a powerful tool. Very simply, money can
be invested to earn money. In this context, consider that when you spend a dollar on a soft drink,
you are actually foregoing 10¢ per year for the rest of your life (assuming a 10% interest rate). And,
as you will soon see, that annual dime of savings builds to much more because of interest that is
earned on the interest! This is the almost magical power of compound interest.
Compound interest calculations can be used to compute the amount to which an investment will
grow in the future. Compound interest is also called future value. If you invest $1 for one year, at
10% interest per year, how much will you have at the end of the year? The answer, of course, is
$1.10. This is calculated by multiplying the $1 by 10% ($...
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