Multiple Choice
Approximately what annual interest rate, compounded annually, is needed to double an investment in 5 years?
62
views
10. Time Value of Money
Time Value of Money Equations
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
What is the present value of \$500.00 to be received in two years if the annual interest rate is 5\% compounded annually?
A
\$476.19
B
\$500.00
C
\$450.00
D
\$453.51
Verified step by step guidance1
Understand the concept of present value: Present value (PV) 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 formula: PV = FV / (1 + r)^n, where FV is the future value, r is the annual interest rate, and n is the number of years.
Identify the given values in the problem: The future value (FV) is \$500.00, the annual interest rate (r) is 5% (or 0.05 in decimal form), and the number of years (n) is 2.
Substitute the given values into the formula: PV = 500 / (1 + 0.05)^2. This involves adding 1 to the interest rate (0.05), raising the result to the power of 2, and then dividing the future value (\$500) by this calculated value.
Perform the intermediate calculations step-by-step: First, calculate (1 + 0.05) = 1.05. Then, raise 1.05 to the power of 2, which is 1.05^2. Finally, divide \$500 by the result of 1.05^2.
Interpret the result: The calculated present value represents the amount you would need to invest today at a 5% annual interest rate to have \$500 in two years. This demonstrates the time value of money concept.
5:55mWatch next
Master Time Value of Money and Using Timelines with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Time Value of Money Equations practice set
Problem sets built by lead tutorsExpert video explanations