Summary: Acco Chapter5

Read the summary and the most important questions on ACCO Chapter5

• 1 Basic Time Value Concepts

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• Applications of PV-based measurements in ACCO Topics

  1. Notes
     
  2. Leases
  3. Pensions & Other postretirement benefits
  4. Long-Term Assets
  5. Stock-Based Compensation
  6. Business Combination
  7. Disclosures
  8. Environmental Liablities

• Determining Compounding Frequency/periods

  (i) Interest Rate per Compounding period= Annual Interst Rate/Number of Compounding periods
  (n) Number of compounding periods= # of years x # of compounding periods

• How to solve compound interest problems: understanding Variables and Formulas

  -Fundamental Variables:
  

  1. Rate of Interest
  2. # of time periods
  3. Future Value
  4. Present Value 

• 2 Single-Sum Problems-F & PV of 1

• Future Value of a single sum(FV of 1)

  -The value at a future date of a given amount invested, assuming compound interest (Money Today to future)
  -FV=PV*( FVF n,i)
  

  • FV=Future Value
  • PV=Present Value
  • FVF n,i= FV factor for n periods at i interest

• Present Value of a Single Sum (PV of 1)

  -The value now of a given amount in the future, assuming compound interest. (Money in future to today)
  -PV=FV*(PVF n,i)

• 3 Annuities (Future Values)

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• FV of an Annuity- Ordinary & Due

  -Ordinary: Rent occurs at the end of period | No interest in the 1st period
  -Due: Rent occurs at beginning of period | Interest in the 1st period

• FV of an Ordinary Annuity

  FV of an Ordinary Annuity= R*(FVF-OA n,i) || =R*{((1+i)^n-1)/i}
  

  • R=Periodic rent
  • i=rate of interest per compounding period
  • n=number of compounding periods

  
  -Rent occrs at end of period causing no interest in the 1st period

• Differences of the FV of Annuities (Ordinary and Due) looks like

  The differences of interest for beginning periods

• 4 Annuities (Present Values)

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• PV of an Ordinary Annuity (PV of OA)

  -The present value of a series of equal rents, to be withdrawn at equal intervals at the end of the period. 
  -Present Value of an Ordinary Annuity= R*(PVF-OA n,i)
  

  • R=Periodic rent (Ordinary Annuity)  

• PV of an Annuity due (PV of AD)

  -The difference to PV-OA is there is one less discount period, due to interest being at beginning of the period.
  -Present value factor for an annuity due=R * (PVF-AD n,i)
  -PVF-AD= PVF-OA n,i * (1+i)