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 the going rate of interest is 10\% per year, what is the present value (PV) of \$1,000 to be received in 3 years? (Assume annual compounding.)

$1,331.00

$800.00

$751.31

$900.00

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Verified step by step guidance

Understand the concept of Present Value (PV): Present Value 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 interest rate per period, and n is the number of periods.

Identify the given values from the problem: The future value (FV) is $1,000, the annual interest rate (r) is 10% or 0.10, and the number of years (n) is 3.

Substitute the given values into the formula: PV = 1000 / (1 + 0.10)^3. This involves adding 1 to the interest rate (0.10), raising the result to the power of 3, and then dividing the future value ($1,000) by this calculated value.

Perform the intermediate calculations step-by-step: First, calculate (1 + 0.10) = 1.10. Then, raise 1.10 to the power of 3, which is 1.10^3. Finally, divide $1,000 by the result of 1.10^3.

Interpret the result: The calculated present value represents the amount you would need to invest today at a 10% annual interest rate to have $1,000 in 3 years. This demonstrates the time value of money concept.