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 annual interest rate, compounded annually, will cause your money to double in four years?

25.00\%

18.92\%

8.00\%

12.50\%

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Verified step by step guidance

Step 1: Understand the problem. You are tasked with finding the annual interest rate, compounded annually, that will cause an initial investment to double in four years. This involves using the formula for compound interest.

Step 2: Recall the formula for compound interest: \( A = P(1 + r)^t \), where \( A \) is the future value, \( P \) is the principal amount, \( r \) is the annual interest rate, and \( t \) is the time in years. In this case, \( A \) is twice \( P \), and \( t \) is 4 years.

Step 3: Substitute the known values into the formula. Since \( A = 2P \), the equation becomes \( 2P = P(1 + r)^4 \). Simplify by dividing both sides by \( P \), resulting in \( 2 = (1 + r)^4 \).

Step 4: Solve for \( r \). Take the fourth root of both sides to isolate \( 1 + r \): \( \sqrt[4]{2} = 1 + r \). Then subtract 1 from both sides to find \( r \): \( r = \sqrt[4]{2} - 1 \).

Step 5: Convert \( r \) into a percentage by multiplying by 100. This will give you the annual interest rate that causes the money to double in four years.