Long-Term Decision Making - The University of Texas at...

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The University of Texas at AustinMcCombs School of Business, BusinessFoundations ProgramACC 310F: Foundations of AccountingClass Notes on Long-term Decision MakingChapter 16 (pages 635 – 647) and the Appendix to Chapter 6Key TermsPrincipal is the amount borrowed or invested on which interest will be earned or paid over astated number of time periods (n).Interest is the payment for the use of another’s money and is usually specified at a statedpercentage rate (i).For this class we will assume that all interest rates are compoundinterest rates such that interest is computed on the principal and any interest earned thathas not yet been paid or withdrawn.A future value (FV) is what an amount now will be worth at a specified point in the futuregiven a stated interest rate.A present value (PV) is the value today of an amount to be received or paid at a specifieddate in the future given a stated interest rate.An annuity is a series of cash flows that are constant in amount each time period whosefuture value (FVa) or present value (PVa) can be calculated.The net present value (NPV) method is a capital budgeting technique that uses a giveninterest rate to determine the present value of cash flows related to a potential investment.For this class we will focus on this method instead of other methods noted in the textbooksuch as internal rate of return or accounting rate of return.Source Document(fromTransaction Analysis, Chapter 4)Money Owed:TodayYear 1Year 2$5,000x 0.12 interest$5,600x 0.12$6,272You can do this problem by using the table for Future Value of $1:2 Periods at 12% is a factor of 1.2544.

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