1460T_c06.qxd12/2/0509:28 am Page288 EQA 288.Chapter 6 Accounting and the Time Value of Money Entering N=180(12 X 15 years),I =8.4,PMT =-700,FV =0,and pressing PV,you find a present value of $71,509.81-the maximum house price you can afford,given that you want to keep your mortgage payments at $700.Note that by changing any of the variables,you can quickly conduct "what-if"analyses for different factual situations. Individual Retirement Account (IRA) Assume you opened an IRA on April 15,1997,with a deposit of $2,000.Since then you have deposited $100 in the account every 2 weeks(26 deposits per year,with the first $100 deposit made on April 29,1997).The account pays 7.6%annual interest com- pounded semi-monthly(with each deposit).How much will be in the account on April 15,2007?Illustration 6A-9 depicts this problem. ILLUSTRATION 6A-9 Calculator Solution for Inputs: 260 7.6 -2.000 -100 IRA Balance N PV PMT FV Answer: 43,131.79 By entering N =260 (26 X 10 years),I=7.6,PV =-2,000,PMT =-100,and press- ing FV,you determine the future value of $43,131.79.This is the amount that the IRA will grow to over the 10-year period.Note that in this problem we use four of the keys and solve for the fifth.Thus,we combine the future value of a single sum and of an annuity.Other problems similar to this are illustrated in Chapters 7 and 14. SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 6A 10.Use a financial calculator to solve time value of money problems.Financial calcula- tors can be used to solve the same and additional problems as those solved with time value of money tables.One enters into the financial calculator the amounts for all but one of the unknown elements of a time value of money problem(periods,interest rate,payments,future or present value).Particularly useful situations involve inter- est rates and compounding periods not presented in the tables. Note:All asterisked Exercises and Problems relate to material contained in the chap- ter appendix.You will need a calculator for these assignments. QUESTIONS 1.What is the time value of money?Why should account- 4.What are the components of an interest rate?Why is it ants have an understanding of compound interest,an- important for accountants to understand these compo- nuities,and present value concepts? nents? 2.Identify three situations in which accounting measures 5.Presented are a number of values taken from compound interest tables involving the same number of periods and are based on present values.Do these present value ap- the same rate of interest.Indicate what each of these four plications involve single sums or annuities,or both sin- gle sums and annuities?Explain. values represents. (a)6.71008 (c).46319 3.What is the nature of interest?Distinguish between "simple interest"and "compound interest." (b)2.15892 (d)14.48656288 • Chapter 6 Accounting and the Time Value of Money By entering N 260 (26  10 years), I 7.6, PV 2,000, PMT 100, and press￾ing FV, you determine the future value of $43,131.79. This is the amount that the IRA will grow to over the 10-year period. Note that in this problem we use four of the keys and solve for the fifth. Thus, we combine the future value of a single sum and of an annuity. Other problems similar to this are illustrated in Chapters 7 and 14. SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 6A 10. Use a financial calculator to solve time value of money problems. Financial calcula￾tors can be used to solve the same and additional problems as those solved with time value of money tables. One enters into the financial calculator the amounts for all but one of the unknown elements of a time value of money problem (periods, interest rate, payments, future or present value). Particularly useful situations involve inter￾est rates and compounding periods not presented in the tables. Note: All asterisked Exercises and Problems relate to material contained in the chap￾ter appendix. You will need a calculator for these assignments. Entering N 180 (12  15 years), I 8.4, PMT 700, FV 0, and pressing PV, you find a present value of $71,509.81—the maximum house price you can afford, given that you want to keep your mortgage payments at $700. Note that by changing any of the variables, you can quickly conduct “what-if” analyses for different factual situations. Individual Retirement Account (IRA) Assume you opened an IRA on April 15, 1997, with a deposit of $2,000. Since then you have deposited $100 in the account every 2 weeks (26 deposits per year, with the first $100 deposit made on April 29, 1997). The account pays 7.6% annual interest com￾pounded semi-monthly (with each deposit). How much will be in the account on April 15, 2007? Illustration 6A-9 depicts this problem. 4. What are the components of an interest rate? Why is it important for accountants to understand these compo￾nents? 5. Presented are a number of values taken from compound interest tables involving the same number of periods and the same rate of interest. Indicate what each of these four values represents. (a) 6.71008 (c) .46319 (b) 2.15892 (d) 14.48656 QUESTIONS 1. What is the time value of money? Why should account￾ants have an understanding of compound interest, an￾nuities, and present value concepts? 2. Identify three situations in which accounting measures are based on present values. Do these present value ap￾plications involve single sums or annuities, or both sin￾gle sums and annuities? Explain. 3. What is the nature of interest? Distinguish between “simple interest” and “compound interest.” N Inputs: 260 7.6 –2,000 –100 ? Answer: I PV PMT FV 43,131.79 ILLUSTRATION 6A-9 Calculator Solution for IRA Balance 1460T_c06.qxd 12/2/05 09:28 am Page 288