appendix

Time Value of Money

A-1
A
Would you rather receive $1,000 today or a year from now? You should prefer
to receive the $1,000 today because you can invest the $1,000 and earn interest
on it. As a result, you will have more than $1,000 a year from now. What this
example illustrates is the concept of the time value of money. Everyone prefers
to receive money today rather than in the future because of the interest factor.
Nature of Interest
Interest is payment for the use of another persons money. It is the difference
between the amount borrowed or invested (called the principal) and the amount
repaid or collected. The amount of interest to be paid or collected is usually
stated as a rate over a specific period of time. The rate of interest is generally
stated as an annual rate.
The amount of interest involved in any financing transaction is based on
three elements:
1. Principal (p): The original amount borrowed or invested.
2. Interest Rate (i): An annual percentage of the principal.
3. Time (n): The number of years that the principal is borrowed or invested.
SIMPLE INTEREST
Simple interest is computed on the principal amount only. It is the return on
the principal for one period. Simple interest is usually expressed as shown in
Illustration A-1 (page A-2).
Distinguish between simple
and compound interest.
1
study objective
study objectives
After studying this appendix, you should be able to:
1 Distinguish between simple and compound interest.
2 Solve for future value of a single amount.
3 Solve for future value of an annuity.
4 Identify the variables fundamental to solving present
value problems.
5 Solve for present value of a single amount.
6 Solve for present value of an annuity.
7 Compute the present values in capital budgeting situations.
8 Use a financial calculator to solve time value of money
problems.
Interest
Principal

Rate

Time
p i n
For example, if you borrowed $5,000 for 2 years at a simple interest rate of
12% annually, you would pay $1,200 in total interest computed as follows:
Interest p i n
$5,000 .12 2
$1,200
Illustration A-1
Interest computation
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COMPOUND INTEREST
Compound interest is computed on principal and on any interest earned that
has not been paid or withdrawn. It is the return on (or growth of) the principal
for two or more time periods. Compounding computes interest not only on the
principal but also on the interest earned to date on that principal, assuming the
interest is left on deposit.
To illustrate the difference between simple and compound interest, assume
that you deposit $1,000 in BankOne, where it will earn simple interest of 9% per
year, and you deposit another $1,000 in CityCorp, where it will earn compound
interest of 9% per year compounded annually. Also assume that in both cases
you will not withdraw any cash until three years from the date of deposit. The
computation of interest to be received and the accumulated year-end balances
are indicated in Illustration A-2.
A-2 appendix A Time Value of Money
Simple Interest
Calculation
Year 1
Year 2
Year 3
$1, 000. 00 9%
$1, 000. 00 9%
$1, 000. 00 9%
$
$
90.00
90.00
90.00
270.00
$1,090.00
$1,180.00
$1,270.00
$25.03
Difference
Simple
Interest
Accumulated
Year-end
Balance
BankOne
Compound Interest
Calculation
Year 1
Year 2
Year 3
$1, 000. 00 9%
$1, 090. 00 9%
$1, 188. 10 9%
$
$
90.00
98.10
106.93
295.03
$1,090.00
$1,188.10
$1,295.03
Compound
Interest
Accumulated
Year-end
Balance
CityCorp
Illustration A-2
Simple vs. compound
interest
Note in the illustration above that simple interest uses the initial principal
of $1,000 to compute the interest in all three years. Compound interest uses the
accumulated balance (principal plus interest to date) at each year-end to com-
pute interest in the succeeding yearwhich explains why your compound interest
account is larger.
Obviously if you had a choice between investing your money at simple in-
terest or at compound interest, you would choose compound interest, all other
thingsespecially riskbeing equal. In the example, compounding provides
$25.03 of additional interest income. For practical purposes, compounding as-
sumes that unpaid interest earned becomes a part of the principal, and the accu-
mulated balance at the end of each year becomes the new principal on which
interest is earned during the next year.
As can be seen in Illustration A-2, you should invest your money at CityCorp,
which compounds interest annually. Compound interest is used in most business
situations. Simple interest is generally applicable only to short-term situations of
one year or less.
Future Value of a Single Amount
The future value of a single amount is the value at a future date of a given
amount invested assuming compound interest. For example, in Illustration A-2,
$1,295.03 is the future value of the $1,000 at the end of three years at 9%
section one
Future Value Concepts
Solve for future value of a
single amount.
2
study objective
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interest. The $1,295.03 could be determined more easily by using the following
formula.
Future Value of a Single Amount A-3
FV p (1 i )
n
where
FV future value of a single amount
p principal (or present value; the value today)
i interest rate for one period
n number of periods
Illustration A-3
Future value computation
The future value of the CityCorp deposit in Illustration A-2 is computed as
follows.
FV p (1 i)
n
$1,000 (1 .09)
3
$1,000 1.29503
$1,295.03
The 1.29503 is computed by multiplying (1.09 1.09 1.09). The amounts in
this example can be depicted in the following time diagram.
Illustration A-4
Time diagram
Present Value (p)
0
$1,000
1 2 3
$1,295.03
i = 9% Future
Value
n = 3 years
Another method that may be used to compute the future value of a single
amount involves the use of a compound interest table. This table shows the
future value of 1 for n periods. Table 1, shown at the top of the next page, is
such a table.
In Table 1, n is the number of compounding periods, the percentages are
the periodic interest rates, and the decimal numbers in the respective columns
are the future value of 1 factors. To use Table 1, multiply the principal amount
by the future value factor for the specified number of periods and interest rate.
For example, the future value factor for two periods at 9% is 1.18810. Multi-
plying this factor by $1,000 equals $1,188.10, which is the accumulated balance
at the end of year 2 in the CityCorp example in Illustration A-2. The $1,295.03
accumulated balance at the end of the third year can be calculated from Table
1 by multiplying the future value factor for three periods (1.29503) by the
$1,000.
The problem in Illustration A-5 (next page) shows how to use Table 1.
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A-4 appendix A Time Value of Money
TABLE 1
Future Value of 1
(n)
Periods 4% 5% 6% 8% 9% 10% 11% 12% 15%
0 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
1 1.04000 1.05000 1.06000 1.08000 1.09000 1.10000 1.11000 1.12000 1.15000
2 1.08160 1.10250 1.12360 1.16640 1.18810 1.21000 1.23210 1.25440 1.32250
3 1.12486 1.15763 1.19102 1.25971 1.29503 1.33100 1.36763 1.40493 1.52088
4 1.16986 1.21551 1.26248 1.36049 1.41158 1.46410 1.51807 1.57352 1.74901
5 1.21665 1.27628 1.33823 1.46933 1.53862 1.61051 1.68506 1.76234 2.01136
6 1.26532 1.34010 1.41852 1.58687 1.67710 1.77156 1.87041 1.97382 2.31306
7 1.31593 1.40710 1.50363 1.71382 1.82804 1.94872 2.07616 2.21068 2.66002
8 1.36857 1.47746 1.59385 1.85093 1.99256 2.14359 2.30454 2.47596 3.05902
9 1.42331 1.55133 1.68948 1.99900 2.17189 2.35795 2.55803 2.77308 3.51788
10 1.48024 1.62889 1.79085 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556
11 1.53945 1.71034 1.89830 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239
12 1.60103 1.79586 2.01220 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025
13 1.66507 1.88565 2.13293 2.71962 3.06581 3.45227 3.88328 4.36349 6.15279
14 1.73168 1.97993 2.26090 2.93719 3.34173 3.79750 4.31044 4.88711 7.07571
15 1.80094 2.07893 2.39656 3.17217 3.64248 4.17725 4.78459 5.47357 8.13706
16 1.87298 2.18287 2.54035 3.42594 3.97031 4.59497 5.31089 6.13039 9.35762
17 1.94790 2.29202 2.69277 3.70002 4.32763 5.05447 5.89509 6.86604 10.76126
18 2.02582 2.40662 2.85434 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545
19 2.10685 2.52695 3.02560 4.31570 5.14166 6.11591 7.26334 8.61276 14.23177
20 2.19112 2.65330 3.20714 4.66096 5.60441 6.72750 8.06231 9.64629 16.36654
Illustration A-5
Demonstration Problem
Using Table 1 for FV of 1
0
$20,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
i = 6%
Future
Value = ? Present Value (p)
n = 18 years
John and Mary Rich invested $20,000 in a savings account paying 6% interest at the time their son,
Mike, was born. The money is to be used by Mike for his college education. On his 18th birthday,
Mike withdraws the money from his savings account. How much did Mike withdraw from his account?
Answer: The future value factor from Table 1 is 2.85434 (18 periods at 6%). The future value of
$20,000 earning 6% per year for 18 years is $57,086.80 ($20,000 2.85434).
Future Value of an Annuity
The preceding discussion involved the accumulation of only a single principal
sum. Individuals and businesses frequently encounter situations in which a se-
ries of equal dollar amounts are to be paid or received at evenly spaced time
intervals (periodically), such as loans or lease (rental) contracts. Such pay-
ments or receipts of equal dollar amounts are referred to as annuities. The
Solve for future value of
an annuity.
3
study objective
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future value of an annuity is the sum of all the payments (receipts) plus the
accumulated compound interest on them. In computing the future value of an
annuity, it is necessary to know (1) the interest rate, (2) the number of com-
pounding periods, and (3) the amount of the periodic payments or receipts.
To illustrate the computation of the future value of an annuity, assume that
you invest $2,000 at the end of each year for three years at 5% interest compounded
annually. This situation is depicted in the time diagram in Illustration A-6.
Future Value of an Annuity A-5
Illustration A-6
Time diagram for a three-
year annuity
0 1 2 3
$2,000
Present
Value $2,000 $2,000
i = 5% Future
Value = ?
n = 3 years
As can be seen in Illustration A-6, the $2,000 invested at the end of year 1
will earn interest for two years (years 2 and 3), and the $2,000 invested at the
end of year 2 will earn interest for one year (year 3). However, the last $2,000
investment (made at the end of year 3) will not earn any interest. The future
value of these periodic payments could be computed using the future value fac-
tors from Table 1 as shown in Illustration A-7.
The first $2,000 investment is multiplied by the future value factor for two periods
(1.1025) because two years interest will accumulate on it (in years 2 and 3). The
second $2,000 investment will earn only one years interest (in year 3) and there-
fore is multiplied by the future value factor for one year (1.0500). The final $2,000
investment is made at the end of the third year and will not earn any interest. Thus
n 0, and the future value factor is 1.00000. Consequently, the future value of the
last $2,000 invested is only $2,000 since it does not accumulate any interest.
This method of calculation is required when the periodic payments or receipts
are not equal in each period. However, when the periodic payments (receipts) are
the same in each period, the future value can be computed by using a future value
of an annuity of 1 table. Table 2, shown on page A-6, is such a table.
Table 2 shows the future value of 1 to be received periodically for a given
number of end-of-period payments. You can see from Table 2 that the future
Illustration A-7
Future value of periodic
payments
Invested at Number of Amount Future Value of Future
End of Year Compounding Periods Invested 1 Factor at 5% Value
1 2 $2,000 1.10250 $ 2,205
2 1 $2,000 1.05000 2,100
3 0 $2,000 1.00000 2,000
3.15250 $6,305
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value of an annuity of 1 factor for three periods at 5% is 3.15250. The future
value factor is the total of the three individual future value factors as shown in
Illustration A-7. Multiplying this amount by the annual investment of $2,000 pro-
duces a future value of $6,305.
The demonstration problem in Illustration A-8 illustrates how to use Table 2.
A-6 appendix A Time Value of Money
TABLE 2
Future Value of an Annuity of 1
(n)
Periods 4% 5% 6% 8% 9% 10% 11% 12% 15%
1 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
2 2.04000 2.05000 2.06000 2.08000 2.09000 2.10000 2.11000 2.12000 2.15000
3 3.12160 3.15250 3.18360 3.24640 3.27810 3.31000 3.34210 3.37440 3.47250
4 4.24646 4.31013 4.37462 4.50611 4.57313 4.64100 4.70973 4.77933 4.99338
5 5.41632 5.52563 5.63709 5.86660 5.98471 6.10510 6.22780 6.35285 6.74238
6 6.63298 6.80191 6.97532 7.33592 7.52334 7.71561 7.91286 8.11519 8.75374
7 7.89829 8.14201 8.39384 8.92280 9.20044 9.48717 9.78327 10.08901 11.06680
8 9.21423 9.54911 9.89747 10.63663 11.02847 11.43589 11.85943 12.29969 13.72682
9 10.58280 11.02656 11.49132 12.48756 13.02104 13.57948 14.16397 14.77566 16.78584
10 12.00611 12.57789 13.18079 14.48656 15.19293 15.93743 16.72201 17.54874 20.30372
11 13.48635 14.20679 14.97164 16.64549 17.56029 18.53117 19.56143 20.65458 24.34928
12 15.02581 15.91713 16.86994 18.97713 20.14072 21.38428 22.71319 24.13313 29.00167
13 16.62684 17.71298 18.88214 21.49530 22.95339 24.52271 26.21164 28.02911 34.35192
14 18.29191 19.59863 21.01507 24.21492 26.01919 27.97498 30.09492 32.39260 40.50471
15 20.02359 21.57856 23.27597 27.15211 29.36092 31.77248 34.40536 37.27972 47.58041
16 21.82453 23.65749 25.67253 30.32428 33.00340 35.94973 39.18995 42.75328 55.71747
17 23.69751 25.84037 28.21288 33.75023 36.97351 40.54470 44.50084 48.88367 65.07509
18 25.64541 28.13238 30.90565 37.45024 41.30134 45.59917 50.39593 55.74972 75.83636
19 27.67123 30.53900 33.75999 41.44626 46.01846 51.15909 56.93949 63.43968 88.21181
20 29.77808 33.06595 36.78559 45.76196 51.16012 57.27500 64.20283 72.05244 102.44358
0 1 2 3 4
$25,000
Present
Value $25,000 $25,000 $25,000
i = 6% Future
Value = ?
n = 4 years
Henning Printing Company knows that in four years, it must replace one of its existing printing
presses with a new one. To ensure that some funds are available to replace the machine in
four years, the company is depositing $25,000 in a savings account at the end of each of the
next four years (4 deposits in total). The savings account will earn 6% interest compounded
annually. How much will be in the savings account at the end of four years when the new
printing press is to be purchased?
Answer: The future value factor from Table 2 is 4.37462 (4 periods at 6%). The future value of
$25,000 invested at the end of each year for four years at 6% interest is $109,365.50
($25,000 4.37462).
Illustration A-8
Demonstration Problem
Using Table 2 for FV of an
annuity of 1
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The future amount ($1,000), the discount rate (10%), and the number of periods
(1) are known. The variables in this situation can be depicted in the following time
diagram.
Present Value of a Single Amount A-7
Present Value Variables
The present value is the value now of a given amount to be received in the fu-
ture, assuming compound interest. Like the future value, it is based on three
variables: (1) the dollar amount to be received (future amount), (2) the length
of time until the amount is received (number of periods), and (3) the interest
rate (the discount rate). The process of determining the present value is referred
to as discounting the future amount.
In this textbook, present value computations are used in measuring several
items. For example, capital budgeting and other investment proposals are evalu-
ated using present value computations. All rate of return and internal rate of
return computations involve present value techniques.
Present Value of a Single Amount
To illustrate present value concepts, assume that you want to invest a sum of
money today that will provide $1,000 at the end of one year. What amount would
you need to invest today to have $1,000 one year from now? If you want a 10%
rate of return, the investment or present value is $909.09 ($1,000 1.10). The
computation of this amount is shown in Illustration A-9.
section two
Present Value Concepts
Identify the variables
fundamental to solving
present value problems.
4
study objective
Solve for present value of
a single amount.
5
study objective
Present Value Future Value (1 i )
1
PV FV (1 .10)
1
PV $1,000 1.10
PV $909.09
Illustration A-9
Present value computation
$1,000 discounted at 10%
for one year
If the single amount of $1,000 is to be received in two years and discounted at
10% [PV $1,000 (1 .10)
2
], its present value is $826.45 [($1,000 1.10)
1.10], as shown in Illustration A-11 (page A-8).
Illustration A-10
Finding present value if
discounted for one period
i = 10%
n = 1 year
Present
Value (?)
$909.09
Future
Value
$1,000
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The present value of 1 may also be determined through tables that show the
present value of 1 for n periods. In Table 3, n is the number of discounting pe-
riods involved. The percentages are the periodic interest rates or discount rates,
and the five-digit decimal numbers in the respective columns are the present
value of 1 factors.
A-8 appendix A Time Value of Money
Illustration A-11
Finding present value if
discounted for two periods
i = 10%
1
Present
Value (?)
0
Future
Value
2
n = 2 years $826.45 $1,000
TABLE 3
Present Value of 1
(n)
Periods 4% 5% 6% 8% 9% 10% 11% 12% 15%
1 .96154 .95238 .94340 .92593 .91743 .90909 .90090 .89286 .86957
2 .92456 .90703 .89000 .85734 .84168 .82645 .81162 .79719 .75614
3 .88900 .86384 .83962 .79383 .77218 .75132 .73119 .71178 .65752
4 .85480 .82270 .79209 .73503 .70843 .68301 .65873 .63552 .57175
5 .82193 .78353 .74726 .68058 .64993 .62092 .59345 .56743 .49718
6 .79031 .74622 .70496 .63017 .59627 .56447 .53464 .50663 .43233
7 .75992 .71068 .66506 .58349 .54703 .51316 .48166 .45235 .37594
8 .73069 .67684 .62741 .54027 .50187 .46651 .43393 .40388 .32690
9 .70259 .64461 .59190 .50025 .46043 .42410 .39092 .36061 .28426
10 .67556 .61391 .55839 .46319 .42241 .38554 .35218 .32197 .24719
11 .64958 .58468 .52679 .42888 .38753 .35049 .31728 .28748 .21494
12 .62460 .55684 .49697 .39711 .35554 .31863 .28584 .25668 .18691
13 .60057 .53032 .46884 .36770 .32618 .28966 .25751 .22917 .16253
14 .57748 .50507 .44230 .34046 .29925 .26333 .23199 .20462 .14133
15 .55526 .48102 .41727 .31524 .27454 .23939 .20900 .18270 .12289
16 .53391 .45811 .39365 .29189 .25187 .21763 .18829 .16312 .10687
17 .51337 .43630 .37136 .27027 .23107 .19785 .16963 .14564 .09293
18 .49363 .41552 .35034 .25025 .21199 .17986 .15282 .13004 .08081
19 .47464 .39573 .33051 .23171 .19449 .16351 .13768 .11611 .07027
20 .45639 .37689 .31180 .21455 .17843 .14864 .12403 .10367 .06110
When Table 3 is used, the future value is multiplied by the present value factor
specified at the intersection of the number of periods and the discount rate. For
example, the present value factor for one period at a discount rate of 10% is
.90909, which equals the $909.09 ($1,000 .90909) computed in Illustration A-9.
For two periods at a discount rate of 10%, the present value factor is .82645,
which equals the $826.45 ($1,000 .82645) computed previously.
Note that a higher discount rate produces a smaller present value. For ex-
ample, using a 15% discount rate, the present value of $1,000 due one year from
now is $869.57 versus $909.09 at 10%. It should also be recognized that the fur-
ther removed from the present the future value is, the smaller the present value.
For example, using the same discount rate of 10%, the present value of $1,000
due in five years is $620.92. The present value of $1,000 due in one year is
$909.09, a difference of $288.17.
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The following two demonstration problems (Illustrations A-12, A-13) illus-
trate how to use Table 3.
Present Value of an Annuity A-9
Present Value of an Annuity
The preceding discussion involved the discounting of only a single future amount.
Businesses and individuals frequently engage in transactions in which a series
of equal dollar amounts are to be received or paid at evenly spaced time inter-
vals (periodically). Examples of a series of periodic receipts or payments are loan
agreements, installment sales, mortgage notes, lease (rental) contracts, and pen-
sion obligations. These series of periodic receipts or payments are called annu-
ities. The present value of an annuity is the value now of a series of future re-
ceipts or payments, assuming compound interest. In computing the present value
of an annuity, it is necessary to know (1) the discount rate, (2) the number of
discount periods, and (3) the amount of the periodic receipts or payments.
To illustrate the computation of the present value of an annuity, assume that
you will receive $1,000 cash annually for three years at a time when the discount
rate is 10%. This situation is depicted in the time diagram in Illustration A-14
(page A-10).
i = 8%
2
PV = ?
Today
$10,000
3 years 1
Suppose you have a winning lottery ticket and the state gives you the
option of taking $10,000 three years from now or taking the present
value of $10,000 today. The state uses an 8% rate in discounting. How
much will you receive if you accept your winnings today?
Answer: The present value factor from Table 3 is .79383
(3 periods at 8%). The present value of $10,000 to be received in
three years discounted at 8% is $7,938.30 ($10,000 .79383).
n = 3
i = 9%
3
PV = ?
Today
$5,000,000
4 years 1
Determine the amount Metal Fabricators Inc. must deposit today in
its SUPER savings account, paying 9% interest, in order to accumulate
$5,000,000 four years from today for an addition to its manufacturing
plant.
Answer: The present value factor from Table 3 is .70843
(4 periods at 9%). The present value of $5,000,000 to be received
in four years discounted at 9% is $3,542,150 ($5,000,000 .70843).
2
n = 4
Illustration A-12
Demonstration Problem
Using Table 3 for PV of 1
Illustration A-13
Demonstration Problem
Using Table 3 for PV of 1
Solve for present value of
an annuity.
6
study objective
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The present value in this situation may be computed as follows.
A-10 appendix A Time Value of Money
i = 10%
2 Today 3 years
PV = ? $1,000 $1,000 $1,000
1
n = 3
Illustration A-14
Time diagram for a three-
year annuity
This method of calculation is required when the periodic cash flows are not
uniform in each period. However, when the future receipts are the same in each
period, an annuity table can be used. As illustrated in Table 4 below, these
tables show the present value of 1 to be received periodically for a given number
of periods.
Illustration A-15
Present value of a series of
future amounts computation
Present Value of 1
Future Amount Factor at 10% Present Value
$1,000 (One year away) .90909 $ 909.09
$1,000 (Two years away) .82645 826.45
$1,000 (Three years away) .75132 751.32
2.48686 $2,486.86
TABLE 4
Present Value of an Annuity of 1
(n)
Periods 4% 5% 6% 8% 9% 10% 11% 12% 15%
1 .96154 .95238 .94340 .92593 .91743 .90909 .90090 .89286 .86957
2 1.88609 1.85941 1.83339 1.78326 1.75911 1.73554 1.71252 1.69005 1.62571
3 2.77509 2.72325 2.67301 2.57710 2.53130 2.48685 2.44371 2.40183 2.28323
4 3.62990 3.54595 3.46511 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498
5 4.45182 4.32948 4.21236 3.99271 3.88965 3.79079 3.69590 3.60478 3.35216
6 5.24214 5.07569 4.91732 4.62288 4.48592 4.35526 4.23054 4.11141 3.78448
7 6.00205 5.78637 5.58238 5.20637 5.03295 4.86842 4.71220 4.56376 4.16042
8 6.73274 6.46321 6.20979 5.74664 5.53482 5.33493 5.14612 4.96764 4.48732
9 7.43533 7.10782 6.80169 6.24689 5.99525 5.75902 5.53705 5.32825 4.77158
10 8.11090 7.72173 7.36009 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877
11 8.76048 8.30641 7.88687 7.13896 6.80519 6.49506 6.20652 5.93770 5.23371
12 9.38507 8.86325 8.38384 7.53608 7.16073 6.81369 6.49236 6.19437 5.42062
13 9.98565 9.39357 8.85268 7.90378 7.48690 7.10336 6.74987 6.42355 5.58315
14 10.56312 9.89864 9.29498 8.24424 7.78615 7.36669 6.98187 6.62817 5.72448
15 11.11839 10.37966 9.71225 8.55948 8.06069 7.60608 7.19087 6.81086 5.84737
16 11.65230 10.83777 10.10590 8.85137 8.31256 7.82371 7.37916 6.97399 5.95424
17 12.16567 11.27407 10.47726 9.12164 8.54363 8.02155 7.54879 7.11963 6.04716
18 12.65930 11.68959 10.82760 9.37189 8.75563 8.20141 7.70162 7.24967 6.12797
19 13.13394 12.08532 11.15812 9.60360 8.95012 8.36492 7.83929 7.36578 6.19823
20 13.59033 12.46221 11.46992 9.81815 9.12855 8.51356 7.96333 7.46944 6.25933
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-10
You can see from Table 4 that the present value of an annuity of 1 factor for
three periods at 10% is 2.48685.
1
This present value factor is the total of the three
individual present value factors as shown in Illustration A-15. Applying this
amount to the annual cash flow of $1,000 produces a present value of $2,486.85.
The following demonstration problem (Illustration A-16) illustrates how to
use Table 4.
Computing the Present Values in a Capital Budgeting Decision A-11
i = 12%
4
PV = ?
Today
$6,000
5 years 1
Steel Products Company has just signed an agreement to purchase
equipment for installment payments of $6,000 each, to be paid at the end
of each of the next five years. In setting the amount of the payments, the
seller used a discount rate of 12%. What is the present value of the
installment paymentsthat is, how much is Steel Products paying for the
equipment, and how much is it paying in total interest over the term of the
installment contract?
Answer: The present value factor from Table 4 is 3.60478 (5 periods
at 12%). The present value of five payments of $6,000 each discounted
at 12% is $21,628.68 ($6,000 3.60478). Therefore, the cost of the
equipment to Steel Products is $21,628.68 and the financing charge
(interest) is $8,371.32 [($6,000 5) $21,628.68].
$6,000 $6,000
2 3
$6,000 $6,000
n = 5
Illustration A-16
Demonstration Problem
Using Table 4 for PV of an
annuity of 1
Time Periods and Discounting
In the preceding calculations, the discounting has been done on an annual basis
using an annual interest rate. Discounting may also be done over shorter periods
of time such as monthly, quarterly, or semiannually. When the time frame is less
than one year, it is necessary to convert the annual interest rate to the applicable
time frame.
Assume, for example, that the investor in Illustration A-15 received $500
semiannually for three years instead of $1,000 annually. In this case, the num-
ber of periods becomes six (3 2), the discount rate is 5% (10% 2), the pres-
ent value factor from Table 4 is 5.07569 (6 periods at 5%), and the present value
of the future cash flows is $2,537.85 (5.07569 $500). This amount is slightly
higher than the $2,486.86 computed in Illustration A-15 because interest is com-
puted twice during the same year. That is, during the second half of the year, in-
terest is earned on the first half years interest.
Computing the Present Values
in a Capital Budgeting Decision
The decision to make long-term capital investments is best evaluated using discount-
ing techniques that recognize the time value of money. To do this, many companies
calculate the present value of the cash flows involved in a capital investment.
1
The difference of .00001 between 2.48686 and 2.48685 is due to rounding.
Compute the present
values in capital budgeting
situations.
7
study objective
JWCL162_appa_a001-a020.qxd 8/20/09 11:46 AM Page A-11
To illustrate, Nagel-Siebert Trucking Company, a cross-country freight car-
rier in Montgomery, Illinois, is considering adding another truck to its fleet
because of a purchasing opportunity. Navistar Inc., Nagel-Sieberts primary sup-
plier of overland rigs, is overstocked and offers to sell its biggest rig for $154,000
cash payable upon delivery. Nagel-Siebert knows that the rig will produce a net
cash flow per year of $40,000 for five years (received at the end of each year),
at which time it will be sold for an estimated salvage value of $35,000. Nagel-
Sieberts discount rate in evaluating capital expenditures is 10%. Should Nagel-
Siebert commit to the purchase of this rig?
The cash flows that must be discounted to present value by Nagel-Siebert
are as follows.
Cash payable on delivery (today): $154,000.
Net cash flow from operating the rig: $40,000 for 5 years (at the end of each year).
Cash received from sale of rig at the end of 5 years: $35,000.
The time diagrams for the latter two cash flows are shown in Illustration A-17.
A-12 appendix A Time Value of Money
i = 10%
1 yr.
Present
Value
= ?
Today
Net Operating
Cash Flows
$40,000
5 yr.
Diagram
for Net
Operating
Cash Flows
2 yr. 3 yr. 4 yr.
$40,000 $40,000 $40,000 $40,000
1 yr. Today 5 yr.
Diagram
for
Salvage
Value
2 yr. 3 yr. 4 yr.
i = 10%
Cash
from Sale
$35,000
n = 5
n = 5
Present
Value
= ?
Illustration A-17
Time diagrams for Nagel-
Siebert Trucking Company
Notice from the diagrams that computing the present value of the net oper-
ating cash flows ($40,000 at the end of each year) is discounting an annuity
(Table 4), while computing the present value of the $35,000 salvage value is
discounting a single sum (Table 3). The computation of these present values
is shown in Illustration A-18.
Illustration A-18
Present value computations
at 10%
Present Values Using a 10 Percent Discount Rate
Present value of net operating cash flows received annually
over 5 years:
$40,000 PV of 1 received annually for 5 years at 10%
$40,000 3.79079 $151,631.60
Present value of salvage value (cash) to be received in 5 years
$35,000 PV of 1 received in 5 years at 10%
$35,000 .62092 21,732.20
Present value of cash inflows 173,363.80
Present value cash outflows (purchase price due today at 10%):
$154,000 PV of 1 due today
$154,000 1.00000 154,000.00
Net present value $ 19,363.80
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-12
Because the present value of the cash receipts (inflows) of $173,363.80
($151,631.60 $21,732.20) exceeds the present value of the cash payments (out-
flows) of $154,000.00, the net present value of $19,363.80 is positive, and the
decision to invest should be accepted.
Now assume that Nagel-Siebert uses a discount rate of 15%, not 10%, because
it wants a greater return on its investments in capital assets. The cash receipts and
cash payments by Nagel-Siebert are the same. The present values of these receipts
and cash payments discounted at 15% are shown in Illustration A-19.
Using Financial Calculators A-13
Illustration A-19
Present value computations
at 15 percent
Present Values Using a 15 Percent Discount Rate
Present value of net operating cash flows received annually
over 5 years at 15%:
$40,000 3.35216 $134,086.40
Present value of salvage value (cash) to be received in 5 years
at 15%
$35,000 .49718 17,401.30
Present value of cash inflows $151,487.70
Present value of cash outflows (purchase price due today at 15%):
$154,000 1.00000 154,000.00
Net present value $ (2,512.30)
Because the present value of the cash payments (outflows) of $154,000 exceeds
the present value of the cash receipts (inflows) of $151,487.70 ($134,086.40
$17,401.30), the net present value of $2,512.30 is negative, and the investment
should be rejected.
The above discussion relied on present value tables in solving present value
problems. As we show in the next section, calculators may also be used to com-
pute present values without the use of these tables. Some calculators, especially
the business or financial calculators, have present value (PV) functions that
allow you to calculate present values by merely identifying the proper amount,
discount rate, periods, and pressing the PV key.
Business professionals, once they have mastered the underlying concepts in sec-
tions 1 and 2, often use a financial (business) calculator to solve time value of money
problems. In many cases, they must use calculators if interest rates or time periods
do not correspond with the information provided in the compound interest tables.
To use financial calculators, you enter the time value of money variables into
the calculator. Illustration A-20 shows the five most common keys used to solve
time value of money problems.
2
section three
Using Financial Calculators
Use a financial calculator
to solve time value of
money problems.
8
study objective
N I PV PMT FV
Illustration A-20
Financial calculator keys
2
On many calculators, these keys are actual buttons on the face of the calculator; on others they
appear on the display after the user accesses a present value menu.
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-13
where
N number of periods
I interest rate per period (some calculators use I/YR or i)
PV present value (occurs at the beginning of the first period)
PMT payment (all payments are equal, and none are skipped)
FV future value (occurs at the end of the last period)
In solving time value of money problems in this appendix, you will gener-
ally be given three of four variables and will have to solve for the remaining vari-
able. The fifth key (the key not used) is given a value of zero to ensure that this
variable is not used in the computation.
Present Value of a Single Sum
To illustrate how to solve a present value problem using a financial calculator,
assume that you want to know the present value of $84,253 to be received in
five years, discounted at 11% compounded annually. Illustration A-21 pictures
this problem.
A-14 appendix A Time Value of Money
? 0 84,253
50,000
N
Inputs: 5
Answer:
11
I PV PMT FV
Illustration A-21
Calculator solution for
present value of a
single sum
The diagram shows you the information (inputs) to enter into the calculator:
N 5, I 11, PMT 0, and FV 84,253. You then press PV for the answer:
$50,000. As indicated, the PMT key was given a value of zero because a series
of payments did not occur in this problem.
PLUS AND MINUS
The use of plus and minus signs in time value of money problems with a finan-
cial calculator can be confusing. Most financial calculators are programmed
so that the positive and negative cash flows in any problem offset each other. In
the present value problem above, we identified the $84,253 future value initial
investment as a positive (inflow); the answer $50,000 was shown as a negative
amount, reflecting a cash outflow. If the 84,253 were entered as a negative, then
the final answer would have been reported as a positive 50,000.
Hopefully, the sign convention will not cause confusion. If you understand
what is required in a problem, you should be able to interpret a positive or neg-
ative amount in determining the solution to a problem.
COMPOUNDING PERIODS
In the problem above, we assumed that compounding occurs once a year. Some
financial calculators have a default setting, which assumes that compounding
occurs 12 times a year. You must determine what default period has been pro-
grammed into your calculator and change it as necessary to arrive at the proper
compounding period.
ROUNDING
Most financial calculators store and calculate using 12 decimal places. As a
result, because compound interest tables generally have factors only up to five
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-14
decimal places, a slight difference in the final answer can result. In most time
value of money problems, the final answer will not include more than two
decimal places.
Present Value of an Annuity
To illustrate how to solve a present value of an annuity problem using a finan-
cial calculator, assume that you are asked to determine the present value of rental
receipts of $6,000 each to be received at the end of each of the next five years,
when discounted at 12%, as pictured in Illustration A-22.
Useful Applications of the Financial Calculator A-15
N
Inputs: 5 12 ? 6,000 0
Answer: 21,628.66
I PV PMT FV
Illustration A-22
Calculator solution for
present value of an annuity
N
Inputs: 36 9.5 6,000 ? 0
Answer: 192.20
I PV PMT FV
Illustration A-23
Calculator solution for auto
loan payments
In this case, you enter N 5, I 12, PMT 6,000, FV 0, and then press PV
to arrive at the answer of $21,628.66.
Useful Applications
of the Financial Calculator
With a financial calculator you can solve for any interest rate or for any num-
ber of periods in a time value of money problem. Here are some examples of
these applications.
AUTO LOAN
Assume you are financing a car with a three-year loan. The loan has a 9.5% nomi-
nal annual interest rate, compounded monthly. The price of the car is $6,000, and
you want to determine the monthly payments, assuming that the payments start
one month after the purchase. This problem is pictured in Illustration A-23.
To solve this problem, you enter N 36 (12 3), I 9.5, PV 6,000, FV 0,
and then press PMT. You will find that the monthly payments will be $192.20.
Note that the payment key is usually programmed for 12 payments per year.
Thus, you must change the default (compounding period) if the payments are
other than monthly.
MORTGAGE LOAN AMOUNT
Lets say you are evaluating financing options for a loan on a house. You decide
that the maximum mortgage payment you can afford is $700 per month. The
annual interest rate is 8.4%. If you get a mortgage that requires you to make
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-15
monthly payments over a 15-year period, what is the maximum purchase price
you can afford? Illustration A-24 depicts this problem.
A-16 appendix A Time Value of Money
N
Inputs: 180 8.4 ? 700 0
Answer: 71,509.81
I PV PMT FV
Illustration A-24
Calculator solution for
mortgage amount
You enter N 180 (12 15 years), I 8.4, PMT 700, FV 0, and press
PV. With the payments-per-year key set at 12, you find a present value of
$71,509.81the maximum house price you can afford, given that you want to
keep your mortgage payments at $700. Note that by changing any of the vari-
ables, you can quickly conduct what-if analyses for different situations.
Summary of Study Objectives
1 Distinguish between simple and compound interest.
Simple interest is computed on the principal only
while compound interest is computed on the princi-
pal and any interest earned that has not been with-
drawn.
2 Solve for future value of a single amount. Prepare a
time diagram of the problem. Identify the principal
amount, the number of compounding periods, and the
interest rate. Using the future value of 1 table, multi-
ply the principal amount by the future value factor
specified at the intersection of the number of periods
and the interest rate.
3 Solve for future value of an annuity. Prepare a time
diagram of the problem. Identify the amount of the
periodic payments (annuities), the number of com-
pounding periods, and the interest rate. Using the fu-
ture value of an annuity of 1 table, multiply the
amount of the annuity by the future value factor spec-
ified at the intersection of the number of periods and
the interest rate.
4 Identify the variables fundamental to solving present
value problems. The following three variables are fun-
damental to solving present value problems: (1) the
future amount, (2) the number of periods, and (3) the
interest rate (the discount rate).
5 Solve for present value of a single amount. Prepare a
time diagram of the problem. Identify the future
amount, the number of discounting periods, and the
discount (interest) rate. Using the present value of
1 table, multiply the future amount by the present
value factor specified at the intersection of the num-
ber of periods and the discount rate.
6 Solve for present value of an annuity. Prepare a time
diagram of the problem. Identify the future amounts
(annuities), the number of discounting periods, and the
discount (interest) rate. Using the present value of an
annuity of 1 table, multiply the amount of the annuity
by the present value factor specified at the intersection
of the number of periods and the interest rate.
7 Compute the present values in capital budgeting situ-
ations. Compute the present values of all cash inflows
and all cash outflows related to the capital budgeting
proposal (an investment-type decision). If the net
present value is positive, accept the proposal (make
the investment). If the net present value is negative,
reject the proposal (do not make the investment).
8 Use a financial calculator to solve time value of money
problems. Financial calculators can be used to solve
the same and additional problems as those solved with
time value of money tables. One enters into the finan-
cial calculator the amounts for all of the known
elements of a time value of money problem (periods,
interest rate, payments, future or present value) and
solves for the unknown element. Particularly useful
situations involve interest rates and compounding pe-
riods not presented in the tables.
Glossary
Annuities (p. A-4) A series of equal dollar amounts to be
paid or received at evenly spaced time intervals (periodically).
Compound interest (p. A-2) The interest computed on
the principal and any interest earned that has not been
paid or withdrawn.
Discounting the future amount(s) (p. A-7) The process
of determining present value.
Future value of a single amount (p. A-2) The value at
a future date of a given amount invested assuming com-
pound interest.
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-16
Brief Exercises A-17
Future value of an annuity (p. A-5) The sum of all the
payments or receipts plus the accumulated compound
interest on them.
Interest (p. A-1) Payment for the use of anothers money.
Present value (p. A-7) The value now of a given amount
to be received in the future, assuming compound interest.
Present value of an annuity (p. A-9) The value now of
a series of future receipts or payments, assuming com-
pound interest.
Principal (p. A-1) The amount borrowed or invested.
Simple interest (p. A-1) The interest computed on the
principal only.
Brief Exercises
Use tables to solve Brief Exercises 1 through 23.
Use a financial calculator to solve Brief Exercises 24 through 28.
BEA-1 Don Smith invested $5,000 at 6% annual interest, and left the money invested
without withdrawing any of the interest for 10 years. At the end of the 10 years, Don
withdrew the accumulated amount of money.
(a) What amount did Don withdraw assuming the investment earns simple interest?
(b) What amount did Don withdraw assuming the investment earns interest compounded
annually?
BEA-2 For each of the following cases, indicate (a) to what interest rate columns and
(b) to what number of periods you would refer in looking up the future value factor.
1. In Table 1 (future value of 1):
Annual Number of
Rate Years Invested Compounded
(a) 6% 5 Annually
(b) 8% 4 Semiannually
2. In Table 2 (future value of an annuity of 1):
Annual Number of
Rate Years Invested Compounded
(a) 5% 10 Annually
(b) 4% 6 Semiannually
BEA-3 Porter Company signed a lease for an office building for a period of 10 years.
Under the lease agreement, a security deposit of $10,000 is made. The deposit will be re-
turned at the expiration of the lease with interest compounded at 4% per year. What
amount will Porter receive at the time the lease expires?
BEA-4 Gordon Company issued $1,000,000, 10-year bonds and agreed to make annual
sinking fund deposits of $75,000. The deposits are made at the end of each year into an
account paying 6% annual interest. What amount will be in the sinking fund at the end
of 10 years?
BEA-5 David and Kathy Hatcher invested $5,000 in a savings account paying 6%
annual interest when their daughter, Sue, was born. They also deposited $500 on each of
her birthdays until she was 18 (including her 18th birthday). How much will be in the
savings account on her 18th birthday (after the last deposit)?
BEA-6 Ron Watson borrowed $20,000 on July 1, 2003. This amount plus accrued in-
terest at 8% compounded annually is to be repaid on July 1, 2011. How much will Ron
have to repay on July 1, 2011?
BEA-7 For each of the following cases, indicate (a) to what interest rate columns and
(b) to what number of periods you would refer in looking up the discount rate.
1. In Table 3 (present value of 1):
Annual Number of Discounts
Rate Years Involved per Year
(a) 12% 5 Semiannually
(b) 10% 15 Annually
(c) 8% 8 Semiannually
Compute the future value of
a single amount.
(SO 2)
Use future value tables.
(SO 2, 3)
Compute the future value of
a single amount.
(SO 2)
Compute the future value of
an annuity.
(SO 3)
Compute the future value of
a single amount and of an
annuity.
(SO 2, 3)
Compute the future value of
a single amount.
(SO 2)
Use present value tables.
(SO 5, 6)
JWCL162_appa_a001-a020.qxd 8/20/09 11:46 AM Page A-17
2. In Table 4 (present value of an annuity of 1):
Annual Number of Number of Frequency of
Rate Years Involved Payments Involved Payments
(a) 12% 20 20 Annually
(b) 10% 5 5 Annually
(c) 8% 4 8 Semiannually
BEA-8 (a) What is the present value of $10,000 due 4 periods from now, discounted at
8%? (b) What is the present value of $10,000 to be received at the end of each of 6 peri-
ods, discounted at 9%?
BEA-9 Smolinski Company is considering an investment which will return a lump sum
of $500,000, 5 years from now. What amount should Smolinski Company pay for this in-
vestment to earn a 12% return?
BEA-10 Pizzeria Company earns 9% on an investment that will return $600,000, 8 years
from now. What is the amount Pizzeria should invest today to earn this rate of return?
BEA-11 Kilarny Company is considering investing in an annuity contract that will re-
turn $20,000 annually at the end of each year for 18 years. What amount should Kilarny
Company pay for this investment if it earns a 6% return?
BEA-12 Zarita Enterprises earns 8% on an investment that pays back $110,000 at the
end of each of the next 4 years. What is the amount Zarita Enterprises invested to earn
the 8% rate of return?
BEA-13 Hernandez Railroad Co. is about to issue $100,000 of 10-year bonds paying a
10% interest rate, with interest payable semiannually. The discount rate for such securi-
ties is 8%. How much can Hernandez expect to receive from the sale of these bonds?
BEA-14 Assume the same information as BEA-13 except that the discount rate was 10%
instead of 8%. In this case, how much can Hernandez expect to receive from the sale of
these bonds?
BEA-15 Caledonian Taco Company receives a $50,000, 6-year note bearing interest of
8% (paid annually) from a customer at a time when the discount rate is 9%. What is the
present value of the note received by Caledonian?
BEA-16 Galway Bay Enterprises issued 10%, 7-year, $2,000,000 par value bonds that
pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2011,
and are issued on that date. The discount rate of interest for such bonds on April 1, 2011,
is 12%. What cash proceeds did Galway Bay receive from issuance of the bonds?
BEA-17 Barney Googal owns a garage and is contemplating purchasing a tire retread-
ing machine for $14,280. After estimating costs and revenues, Barney projects a net cash
flow from the retreading machine of $2,900 annually for 8 years. Barney hopes to earn
a return of 11% on such investments. What is the present value of the retreading opera-
tion? Should Barney Googal purchase the retreading machine?
BEA-18 Hung-Chao Yu Company issues an 8%, 6-year mortgage note on January 1,
2011 to obtain financing for new equipment. Land is used as collateral for the note. The
terms provide for semiannual installment payments of $85,242. What were the cash pro-
ceeds received from the issuance of the note?
BEA-19 Ramos Company is considering purchasing equipment. The equipment will
produce the following cash flows: Year 1, $30,000; Year 2, $40,000; Year 3, $50,000. Ramos
requires a minimum rate of return of 12%. What is the maximum price Ramos should
pay for this equipment?
BEA-20 Kerry Rodriguez invests $3,555.40 now and will receive $10,000 at the end of
12 years. What annual rate of interest will Kerry earn on her investment? (Hint: Use Table 3.)
BEA-21 Maloney Cork has been offered the opportunity of investing $20,462 now. The
investment will earn 12% per year and will at the end of that time return Maloney
$100,000. How many years must Maloney wait to receive $100,000? (Hint: Use Table 3.)
BEA-22 Annie Dublin purchased an investment of $9,818.15. From this investment, she
will receive $1,000 annually for the next 20 years starting one year from now. What rate
of interest will Annies investment be earning for her? (Hint: Use Table 4.)
A-18 appendix A Time Value of Money
Determine present values.
(SO 5, 6)
Compute the present value of
a single amount investment.
(SO 5)
Compute the present value of
a single amount investment.
(SO 5)
Compute the present value of
an annuity investment.
(SO 6)
Compute the present value
of an annuity investment.
(SO 6)
Compute the present value
of bonds.
(SO 5, 6)
Compute the present value
of bonds.
(SO 5, 6)
Compute the present value
of a note.
(SO 5, 6)
Compute the present value
of bonds.
(SO 5, 6)
Compute the present value of
a machine for purposes of
making a purchase decision.
(SO 7)
Compute the present value
of a note.
(SO 6)
Compute the maximum price
to pay for a machine.
(SO 7)
Compute the interest rate on
a single amount.
(SO 5)
Compute the number of
periods of a single amount.
(SO 5)
Compute the interest rate on
an annuity.
(SO 6)
JWCL162_appa_a001-a020.qxd 8/17/09 10:31 AM Page A-18
BEA-23 Andy Sanchez invests $8,863.25 now for a series of $1,000 annual returns
beginning one year from now. Andy will earn a return of 5% on the initial investment.
How many annual payments of $1,000 will Andy receive? (Hint: Use Table 4.)
BEA-24 Reba McEntire wishes to invest $19,000 on July 1, 2011, and have it accumu-
late to $49,000 by July 1, 2021. Use a financial calculator to determine at what exact an-
nual rate of interest Reba must invest the $19,000.
BEA-25 On July 17, 2011, Tim McGraw borrowed $42,000 from his grandfather to open
a clothing store. Starting July 17, 2012, Tim has to make 10 equal annual payments of
$6,500 each to repay the loan. Use a financial calculator to determine what interest rate
Tim is paying.
BEA-26 As the purchaser of a new house, Patty Loveless has signed a mortgage note
to pay the Memphis National Bank and Trust Co. $14,000 every 6 months for 20 years,
at the end of which time she will own the house. At the date the mortgage is signed the
purchase price was $198,000, and Loveless made a down payment of $20,000. The first
payment will be made 6 months after the date the mortgage is signed. Using a financial
calculator, compute the exact rate of interest earned on the mortgage by the bank.
BEA-27 Using a financial calculator, solve for the unknowns in each of the following
situations.
(a) On June 1, 2010, Shelley Long purchases lakefront property from her neighbor, Joey
Brenner, and agrees to pay the purchase price in seven payments of $16,000 each,
the first payment to be payable June 1, 2011. (Assume that interest compounded at
an annual rate of 7.35% is implicit in the payments.) What is the purchase price of
the property?
(b) On January 1, 2010, Cooke Corporation purchased 200 of the $1,000 face value, 8%
coupon, 10-year bonds of Howe Inc. The bonds mature on January 1, 2020, and pay
interest annually beginning January 1, 2011. Cooke purchased the bonds to yield
10.65%. How much did Cooke pay for the bonds?
BEA-28 Using a financial calculator, provide a solution to each of the following situations.
(a) Bill Schroeder owes a debt of $35,000 from the purchase of his new sport utility ve-
hicle. The debt bears annual interest of 9.1% compounded monthly. Bill wishes to
pay the debt and interest in equal monthly payments over 8 years, beginning one
month hence. What equal monthly payments will pay off the debt and interest?
(b) On January 1, 2011, Sammy Sosa offers to buy Mark Graces used snowmobile for
$8,000, payable in five equal annual installments, which are to include 8.25% inter-
est on the unpaid balance and a portion of the principal. If the first payment is to
be made on December 31, 2011, how much will each payment be?
Brief Exercises A-19
Compute the number of
periods of an annuity.
(SO 6)
Determine interest rate.
(SO 8)
Determine interest rate.
(SO 8)
Determine interest rate.
(SO 8)
Various time value of money
situations.
(SO 8)
Various time value of money
situations.
(SO 8)
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