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 \$1,200 to be received in 18 years if the discount rate is 5\% per year, compounded annually?

\$1,080.00

\$900.00

\$1,200.00

\$537.13

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Verified step by step guidance

Step 1: Understand the concept of present value (PV). Present value is the current worth of a future sum of money, discounted at a specific interest rate over a given period of time. The formula for calculating PV is: PV = FV / (1 + r)^n, where FV is the future value, r is the annual discount rate, and n is the number of years.

Step 2: Identify the values given in the problem. The future value (FV) is $1,200, the discount rate (r) is 5% or 0.05, and the number of years (n) is 18.

Step 3: Substitute the given values into the formula. Using MathML, the formula becomes:

PV = \frac{FV}{(1 + r) n}

. Replace FV with 1200, r with 0.05, and n with 18.

Step 4: Simplify the denominator. Calculate (1 + r)^n, which is (1 + 0.05)^18. This involves raising 1.05 to the power of 18.

Step 5: Divide the future value (FV) by the calculated denominator. This will give you the present value (PV). Ensure you understand the importance of discounting future cash flows to their present value in financial decision-making.