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

If John takes out a $10,000 loan at an annual interest rate of 6\% compounded annually for 5 years and repays the loan in equal annual installments, how much total interest will he pay over the course of the loan?

$3,000

$2,000

$1,598.50

$1,500

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Verified step by step guidance

Step 1: Understand the problem. John is repaying a loan of $10,000 with an annual interest rate of 6% compounded annually over 5 years. The goal is to calculate the total interest paid over the course of the loan. This involves determining the equal annual installment amount and then calculating the total interest paid.

Step 2: Use the formula for calculating the equal annual installment (annuity payment) for a loan. The formula is: $ A = \frac{P \cdot r}{1 - (1 + r)^{-n}} $, where $ A $ is the annual installment, $ P $ is the loan principal, $ r $ is the annual interest rate divided by 100, and $ n $ is the number of years.

Step 3: Substitute the values into the formula. Here, $ P = 10,000 $, $ r = \frac{6}{100} = 0.06 $, and $ n = 5 $. Calculate $ A $, the annual installment amount.

Step 4: Multiply the annual installment amount $ A $ by the number of years $ n $ to find the total amount repaid over the course of the loan. Then subtract the original loan principal $ P $ from the total amount repaid to determine the total interest paid.

Step 5: Verify the calculation by ensuring the total interest paid matches the correct answer provided in the problem, which is $1,598.50.