Accounting: The Language of Business - Vol. 2 (Intermediate: Part 94)

Philosophy and science have not always been friendly toward the idea of God, the reason being they are dedicated to the task of accounting for things and are impatient with anything that refuses to give an account of itself. The philosopher and the scientist will admit that there is much that they do not know; but that is quite another thing from admitting there is something which they can never know, which indeed they have no technique for discovering.

Aiden Wilson Tozer

 Accounting and the Time Value of Money (Part G)

by

Charles Lamson 

Factor Table Solution. Table 7A.2 presents the factors for solving present value problems. Similar to table 7A.1 from Part 93, the number of compounding periods is found in rows of the table. Columns have the interest rate per period. The amount presented in the cell for each row and column is computed from the interest component of Equation 7.4 from Part 93 and reintroduced below. It is the factor for the present value of $1 for the given interest rate and number of periods. Equation 7.5 solves single-sum present value problems using the factors in Table 7A.2. 

(7.4)

Click to enlarge.

Refer to the factor that is in the row for the number of compounding periods and the column for the interest rate per compounding period. For example, the factor for a 3% interest rate and 10 periods is 0.74409.

The factors in Table 78.2 indicate that the PV is inversely related to N and I/Y. Example 7.9 illustrates the table approach.

Spreadsheet Solution. Spreadsheet applications such as Microsoft Excel provide a present value function in a spreadsheet cell as follows:

 = PV(I/Y,,N,PMT,FV,type)

For the present value of a single sum, we put a 0 in the third position because there are no periodic payments. Because the type defaults to zero, we do not need to include the last variable because this is not an annuity problem.

EXAMPLE 7.10 Present Value of a Single Sum: Spreadsheet Approach

Financial Calculator Solution. Finally, present value problems can be solved using a financial calculator. To solve the problem in Example 7.10, enter the following keystrokes.

These key strokes correspond to an inflow of $175,000 in 5 years at a 1% interest rate per compounding period and 60 compounding periods. The calculator shows the present value is $(96,328.68).

*GORDON, RAEDY, SANNELLA,, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 324-326*

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