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 Bruce waits for five years to begin paying back his loan, which time value of money concept is most relevant for calculating the present value of his future payments?

Present Value of a Perpetuity

Present Value of a Deferred Annuity

Future Value of a Single Sum

Future Value of an Ordinary Annuity

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Verified step by step guidance

Understand the time value of money concept: The time value of money refers to the idea that money available today is worth more than the same amount in the future due to its earning potential. In this problem, Bruce is deferring payments for five years, which means the calculation involves a deferred annuity.

Define a deferred annuity: A deferred annuity is a series of payments that begin at a future date. The present value of a deferred annuity accounts for the delay in payments and discounts the future cash flows back to the present value using a discount rate.

Identify the formula for the present value of a deferred annuity: The formula combines the present value of an ordinary annuity and adjusts for the deferral period. The formula is: \( PV = \frac{PMT}{r} \times \left(1 - \frac{1}{(1 + r)^n}\right) \times \frac{1}{(1 + r)^t} \), where \( PMT \) is the payment amount, \( r \) is the discount rate, \( n \) is the number of payments, and \( t \) is the deferral period.

Break down the calculation: First, calculate the present value of the ordinary annuity using the formula \( PV_{ordinary} = \frac{PMT}{r} \times \left(1 - \frac{1}{(1 + r)^n}\right) \). Then, adjust for the deferral period by multiplying \( PV_{ordinary} \) by \( \frac{1}{(1 + r)^t} \).

Apply the concept: To determine the present value of Bruce's deferred annuity, you would need the payment amount (\( PMT \)), the discount rate (\( r \)), the number of payments (\( n \)), and the deferral period (\( t \)). Plug these values into the formula to calculate the present value of his future payments.