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

The discount rate that results in a net present value of $0 is the:

Internal Rate of Return (IRR)

Future Value Rate

Payback Period Rate

Weighted Average Cost of Capital (WACC)

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Verified step by step guidance

Understand the concept of the Internal Rate of Return (IRR): The IRR is the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) from a project or investment equals zero. It is a key metric in capital budgeting.

Recall the formula for NPV: $ \text{NPV} = \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 $, where $C_t$ represents cash inflows, $C_0$ is the initial investment, $r$ is the discount rate, and $t$ is the time period.

To find the IRR, set $ \text{NPV} = 0 $ in the NPV formula. This means solving the equation $ 0 = \sum_{t=1}^{n} \frac{C_t}{(1 + r)^t} - C_0 $ for $r$.

Recognize that the IRR is not directly calculated using a simple formula. Instead, it is typically found through iterative methods, such as trial-and-error, interpolation, or using financial calculators or software tools.

Differentiate the IRR from other terms in the problem: The Future Value Rate refers to the growth of an investment over time, the Payback Period Rate measures the time required to recover the initial investment, and the Weighted Average Cost of Capital (WACC) is the average rate of return required by all investors in a company.