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ADMS 2500 Module 8- Time Value of Money.docx

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York University
Administrative Studies
ADMS 2500
Brian Gaber

ADMS 2500 Oct.27.2011 Module 8- Time Value of Money Time Is Money - scarce commodity that owners use as command to other commodities - owners of money let others (borrowers) to rent their money for a period of time - payment for the use of the money called interest (interest expense) Principle, Interest and Economic Substance - managers need to decide if they’re going to make one big lump sum payment or installments - use interest calculations to make amounts of money to be paid or received at different times comparable - contracts, installment purchases, leases, notes mortgages and bonds involve delayed payment or series of money payments over time - concerned with interest because want to show economic substance of transaction - interest and principle reported separately on financial statement Simple and Compound Interest - simple interest charges occur when interest earned is withdrawn and only principle amount remains invested - when only the original principle earns interest during the life of the loan, the interest due at the time the load is repaid is called simple interest - interest earned on previously interest is ignored Present and Future Values - contracts that include delays are calculated by finding the present value of the stream of payment - present value of stream of payment is single amount of money at the present time that’s the economic equivalent to the entire stream - indifferent, this is because if interest values are fixed then then the receiver can invest the present value amount and have it grow with accumulated interest to the exact future sum Future Value Consumption Present Value Consumption - if either or future value or present value is known the other can be solved Changing the Compound Period - shorter the compound period, the sooner interest is earned Ex: Terminology - ‘discount’ is associated with present value - discount on notes receivable/payable compound
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