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

What is the annual rate of return (to the nearest percent) earned on a $1,000 investment that grows to $1,800 in six years? (Assume interest is compounded annually.)

10%

11%

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Verified step by step guidance

Step 1: Understand the formula for calculating the annual rate of return when interest is compounded annually. The formula is: $ FV = PV \times (1 + r)^t $, where $ FV $ is the future value, $ PV $ is the present value, $ r $ is the annual rate of return, and $ t $ is the time in years.

Step 2: Substitute the given values into the formula. Here, $ FV = 1800 $, $ PV = 1000 $, and $ t = 6 $. The equation becomes: $ 1800 = 1000 \times (1 + r)^6 $.

Step 3: Isolate $ (1 + r)^6 $ by dividing both sides of the equation by $ 1000 $. This simplifies to: $ (1 + r)^6 = \frac{1800}{1000} $.

Step 4: Simplify $ \frac{1800}{1000} $ to $ 1.8 $. The equation now becomes: $ (1 + r)^6 = 1.8 $.

Step 5: Solve for $ r $ by taking the sixth root (or raising both sides to the power of $ \frac{1}{6} $) and then subtracting 1. The equation becomes: $ r = (1.8)^{\frac{1}{6}} - 1 $.