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 present value of a $775 annuity payment received at the end of each year for 6 years, if the interest rate is 11\% per year? (Assume ordinary annuity)

$2,900.75

$4,650.00

$5,200.80

$3,360.60

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Verified step by step guidance

Step 1: Understand the concept of present value of an ordinary annuity. The present value of an ordinary annuity is the sum of the discounted values of all future payments, where payments are made at the end of each period. The formula for calculating the present value of an ordinary annuity is: $ PV = PMT \times \frac{1 - (1 + r)^{-n}}{r} $, where $ PMT $ is the annuity payment, $ r $ is the interest rate per period, and $ n $ is the number of periods.

Step 2: Identify the variables from the problem. Here, $ PMT = 775 $, $ r = 0.11 $ (11% annual interest rate), and $ n = 6 $ (6 years). Substitute these values into the formula.

Step 3: Calculate the discount factor $ (1 + r)^{-n} $. First, add 1 to the interest rate $ r $, then raise the result to the power of $ -n $. This step accounts for the time value of money over the 6-year period.

Step 4: Compute $ 1 - (1 + r)^{-n} $. Subtract the discount factor calculated in Step 3 from 1. This represents the cumulative effect of discounting all future payments.

Step 5: Divide the result from Step 4 by $ r $ (the interest rate) and multiply by $ PMT $ (the annuity payment). This will give the present value of the annuity. Ensure all calculations are performed accurately to arrive at the correct present value.