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 will increase the present value of an annuity, assuming all other factors remain constant?

Decreasing the number of periods

Increasing the discount rate

Decreasing the amount of each payment

Decreasing the discount rate

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Verified step by step guidance

Understand the concept of present value of an annuity: The present value of an annuity is the current worth of a series of future payments, discounted at a specific rate. It is influenced by factors such as the number of periods, the discount rate, and the payment amount.

Recall the formula for the present value of an annuity: \( PV = P \times \left( \frac{1 - (1 + r)^{-n}}{r} \right) \), where \( PV \) is the present value, \( P \) is the payment amount, \( r \) is the discount rate per period, and \( n \) is the number of periods.

Analyze the impact of decreasing the discount rate: A lower discount rate \( r \) reduces the denominator in the formula, making the fraction larger. This increases the present value of the annuity because future payments are discounted less heavily.

Compare the other options: Decreasing the number of periods \( n \) reduces the total number of payments, which decreases the present value. Increasing the discount rate \( r \) increases the denominator, reducing the present value. Decreasing the payment amount \( P \) directly reduces the present value.

Conclude that decreasing the discount rate increases the present value of an annuity, as future payments are discounted less, making their present value higher.