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 of an ordinary annuity of \$400 invested each year for 12 years at an annual interest rate of 6%? (Round your answer to the nearest dollar.)

$3,534

$5,200

$2,900

$4,800

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Verified step by step guidance

Step 1: Understand the concept of present value of an ordinary annuity. It represents the current worth of a series of equal payments made at regular intervals, discounted at a specific interest rate.

Step 2: Use the formula for the present value of an ordinary annuity: $ PV = P \times \frac{1 - (1 + r)^{-n}}{r} $, where $ P $ is the payment amount, $ r $ is the annual interest rate (expressed as a decimal), and $ n $ is the number of periods.

Step 3: Substitute the given values into the formula: $ P = 400 $, $ r = 0.06 $, and $ n = 12 $. The formula becomes $ PV = 400 \times \frac{1 - (1 + 0.06)^{-12}}{0.06} $.

Step 4: Calculate the term $ (1 + r)^{-n} $, which is $ (1 + 0.06)^{-12} $. This represents the discount factor for 12 periods at a 6% annual interest rate.

Step 5: Compute the fraction $ \frac{1 - (1 + r)^{-n}}{r} $ and multiply it by $ P $ (the payment amount) to find the present value of the annuity. Round the result to the nearest dollar.