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 represents the basic present value equation?

$PV = FV - (r \times n)$

$PV = \dfrac{FV}{(1 + r)^n}$

$PV = FV \times (1 + r)^n$

$PV = FV \div r$

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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 cash flow, given a specific rate of return (r) and time period (n). It accounts for the time value of money.

Identify the correct formula for present value: The basic present value equation is derived from the principle that future value (FV) is discounted back to the present using the formula $PV = \dfrac{FV}{(1 + r)^n}$. This formula accounts for the compounding effect of the interest rate over time.

Break down the formula: In the equation $PV = \dfrac{FV}{(1 + r)^n}$, FV represents the future value, r is the interest rate (expressed as a decimal), and n is the number of compounding periods.

Compare the given options: Analyze each option provided in the problem. The correct formula is $PV = \dfrac{FV}{(1 + r)^n}$, as it properly discounts the future value to the present value using the compounding factor $(1 + r)^n$. The other options do not correctly represent the relationship between PV, FV, r, and n.

Conclude the reasoning: The correct answer is $PV = \dfrac{FV}{(1 + r)^n}$ because it aligns with the fundamental principles of the time value of money and accurately calculates the present value of a future sum.