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

A project that provides annual cash flows of $5,000 for 4 years, with a required rate of return of 8\%, has a present value closest to which of the following amounts?

$16,620

$18,520

$13,620

$20,000

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Verified step by step guidance

Step 1: Understand the problem. The goal is to calculate the present value (PV) of a series of annual cash flows using the formula for the present value of an ordinary annuity. The cash flows are $5,000 per year for 4 years, and the required rate of return is 8%.

Step 2: Recall the formula for the present value of an ordinary annuity: $ PV = C \times \frac{1 - (1 + r)^{-n}}{r} $, where $ C $ is the annual cash flow, $ r $ is the required rate of return (expressed as a decimal), and $ n $ is the number of periods.

Step 3: Substitute the given values into the formula: $ C = 5000 $, $ r = 0.08 $, and $ n = 4 $. The formula becomes $ PV = 5000 \times \frac{1 - (1 + 0.08)^{-4}}{0.08} $.

Step 4: Calculate the term $ (1 + r)^{-n} $. This involves raising $ (1 + 0.08) $ to the power of $ -4 $. Then subtract this value from 1.

Step 5: Divide the result from Step 4 by $ r $ (0.08), and multiply the quotient by $ C $ (5000). This will give the present value of the cash flows. Compare the calculated value to the provided options to determine the closest match.