Mastery Problem: Time Value of Money Time value of money Due to both interest earnings and the fact that money put to good use should generate additional funds above and beyond the original row will be worth less than money today. Simple Interest Stone Co., a company that you regularly do business with, gives you a $18,000 note. The note is due in three years and pays simple interest of 10%% annually. How much will Stone pay you at the and of that term? Note: Enter the interest rate as a decimall (Le. 15% would be entered an .15) Principal + ( Principal x Rate x Time ) = Total years ) = $ Compound interest With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the princi year will dictate how many interest computations are required (Le. annually is once, semi-annually is twice, and quarterly is four times). Imagine that Stone Co., fearing that you wouldn't take its deal, decides instead to offer you con und interest on the same $18,000 note. How much wil Stone pay you at the end of thre round your answers to the nearest cert. Principal Annual Amount Accumulated Amount of at Amount at Interest End of Year (Principal (Principal at at Beginning of Beginning of Beginning of Year + Year x Annual Year Year 10%) Amount of Interest) $18,000 $1,80 $19,800 $19,800 If you were given the choice to receive more or less compounding periods, which would you choose in order to maximize your m APPLY THE CONCEPTS: Present value of a single amount in the future As it is important to know what a current investment will yield at a point in the future, it is equally important to underst now, assuming annual compounding at 5%. d in order to yield $8,000 three years from Future Value $8,000 Year 1 Year 2 Year Present Value: The most straightforward method for calculating the present value of a future amount is to use the Present Value Table. By multiplying the future amo adequately determine the present value. ons for using present value tables + Present Value of a Future Amount Tablel - Present Value of $1 at Compound Interest Period 5% 6% 7% 8% 9% 10% 11% 12% 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.864 0.840 0.816 0.794 0,772 0.751 0.731 0.712 0.823 0.792 0.763 0,735 0.708 0.683 0.659 0.636 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.677 0.627 0,582 0.540 0.502 0.467 0.434 0.404 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 n 585 0 527 0.475 0.479 0 389 0 350 0 317 0.287 Check My Work 2 more Check My Work uses remaining core: 33.76% All work saved
