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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

What is the present value of the following cash-flow stream if the interest rate is 6\% per year? \[\begin{align}\text{Year 1:} & \quad \$1,000 \\\text{Year 2:} & \quad \$1,000 \\\text{Year 3:} & \quad \$1,000 \end{align}\](A) $2,673.01(B) $2,833.39(C) $2,545.95(D) $3,000.00

$3,000.00

$2,833.39

$2,545.95

$2,673.01

Previous problemNext problem

Verified step by step guidance

Step 1: Understand the concept of present value (PV). Present value is the current worth of a future cash flow or series of cash flows, discounted at a specific interest rate. The formula for PV is: $ PV = \frac{FV}{(1 + r)^n} $, where $ FV $ is the future value, $ r $ is the interest rate, and $ n $ is the number of periods.

Step 2: Break down the cash-flow stream into individual components. In this problem, there are three cash flows: $ \$1,000 $ in Year 1, $ \$1,000 $ in Year 2, and $ \$1,000 $ in Year 3. Each cash flow will be discounted separately to its present value.

Step 3: Apply the present value formula to each cash flow. For Year 1, the formula is $ PV_1 = \frac{1000}{(1 + 0.06)^1} $. For Year 2, the formula is $ PV_2 = \frac{1000}{(1 + 0.06)^2} $. For Year 3, the formula is $ PV_3 = \frac{1000}{(1 + 0.06)^3} $.

Step 4: Sum the present values of all three cash flows to find the total present value. The total present value is $ PV_{total} = PV_1 + PV_2 + PV_3 $.

Step 5: Verify the calculation by ensuring that the discounting process accounts for the time value of money, and compare the calculated total present value to the given options to identify the correct answer.