Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Which of the following affects the present value of an investment?

The interest rate used for discounting

The number of shares outstanding

The market value of inventory

The company's net income

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Verified step by step guidance

Understand the concept of present value: Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return. It is calculated using the discounting process, which adjusts future cash flows for the time value of money.

Identify the key factor affecting present value: The interest rate used for discounting is the primary factor that influences the present value. A higher interest rate reduces the present value, while a lower interest rate increases it. This is because the discounting process adjusts future cash flows based on the rate of return.

Eliminate irrelevant options: The number of shares outstanding, the market value of inventory, and the company's net income do not directly affect the calculation of present value. These factors are related to other aspects of financial analysis, such as equity valuation or operational performance.

Relate the interest rate to the formula: The formula for present value is \( PV = \frac{FV}{(1 + r)^n} \), where \( PV \) is the present value, \( FV \) is the future value, \( r \) is the interest rate (discount rate), and \( n \) is the number of periods. The interest rate \( r \) directly impacts the denominator, thereby affecting the present value.

Conclude the reasoning: Since the interest rate used for discounting is the only factor among the options that directly influences the present value calculation, it is the correct answer to the question.