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

Which of the following changes would decrease the present value of a future payment?

Decreasing the time until payment is received

Increasing the discount rate

Receiving the payment immediately

Decreasing the discount rate

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Verified step by step guidance

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 (discount rate). The formula for present value is PV = \( \frac{FV}{(1 + r)^t} \), where FV is the future value, r is the discount rate, and t is the time until payment.

Analyze the impact of increasing the discount rate: When the discount rate (r) increases, the denominator \( (1 + r)^t \) becomes larger, which decreases the present value. This is because the future payment is discounted more heavily.

Evaluate the effect of decreasing the time until payment: If the time (t) until payment decreases, the exponent \( t \) in \( (1 + r)^t \) becomes smaller, which increases the present value. Therefore, decreasing the time until payment would not decrease the present value.

Consider receiving the payment immediately: If the payment is received immediately, \( t = 0 \), and \( (1 + r)^t \) equals 1. This results in the present value being equal to the future value, which is the maximum possible present value. Thus, receiving the payment immediately would increase the present value.

Analyze the effect of decreasing the discount rate: If the discount rate (r) decreases, the denominator \( (1 + r)^t \) becomes smaller, which increases the present value. Therefore, decreasing the discount rate would not decrease the present value.