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

Assume a project has the following cash flows: an initial investment of $-\$10,000$ at time 0, and returns of \$4,000 at the end of each year for 4 years. If the discount rate is 12\%, what is the Net Present Value (NPV) of this project?

$2,486

$1,052

$-1,052

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Verified step by step guidance

Step 1: Understand the concept of Net Present Value (NPV). NPV is a method used to evaluate the profitability of an investment by calculating the present value of all cash inflows and outflows, discounted at a specific rate. The formula for NPV is:

NPV = \sum C

_t ( 1+r) t - C₀ Where: - Ct = Cash inflow at time t - r = Discount rate - t = Time period - C0 = Initial investment.

Step 2: Identify the cash flows and discount rate from the problem. The initial investment (C0) is

- 10,000

at time 0, and the cash inflows (Ct) are

4,000

at the end of each year for 4 years. The discount rate (r) is

12 %

or 0.12.

Step 3: Break down the NPV calculation into components. For each year (t = 1, 2, 3, 4), calculate the present value of the cash inflow using the formula:

C

_t (1+r) t . Sum up the present values of all cash inflows.

Step 4: Subtract the initial investment (C0) from the total present value of cash inflows. This gives the Net Present Value (NPV). The formula is:

NPV = \sum C

_t (1+r) t - C₀ .

Step 5: Verify the calculation by ensuring all cash inflows are discounted correctly and the initial investment is subtracted accurately. This will yield the NPV, which can then be compared to the options provided in the problem.