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

What is the present value (PV) of an annuity due with 5 payments of $2 each, assuming a discount rate of 10% per period?

$9.00

$8.21

$7.57

$7.91

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Verified step by step guidance

Understand the concept of an annuity due: An annuity due is a series of equal payments made at the beginning of each period. The present value (PV) of an annuity due is calculated by discounting each payment back to its present value using the given discount rate.

Identify the key variables: The number of payments (n) is 5, the payment amount (PMT) is $2, and the discount rate (r) is 10% or 0.10 per period.

Use the formula for the present value of an annuity due: $ PV = PMT \times \left( \frac{1 - (1 + r)^{-n}}{r} \right) \times (1 + r) $. The extra $ (1 + r) $ factor accounts for the fact that payments are made at the beginning of each period.

Substitute the values into the formula: $ PV = 2 \times \left( \frac{1 - (1 + 0.10)^{-5}}{0.10} \right) \times (1 + 0.10) $. Break this into smaller steps for calculation: first calculate $ (1 + r)^{-n} $, then $ 1 - (1 + r)^{-n} $, then divide by $ r $, and finally multiply by $ PMT $ and $ (1 + r) $.

Perform the calculations step by step to arrive at the present value. Ensure that each intermediate step is clear and accurate, and remember that the final result will be the present value of the annuity due.