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

If you desire your savings to double in 6 years, which annual interest rate, compounded annually, is closest to what you need?

8.0%

10.0%

12.0%

Approximately 12.25%

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Verified step by step guidance

Step 1: Understand the concept of doubling savings. This involves using the Rule of 72, which is a shortcut to estimate the time required for an investment to double given a fixed annual interest rate. The formula is: \( ext{Rate} = rac{72}{ ext{Time}} \).

Step 2: Apply the Rule of 72 to the problem. Since the desired doubling time is 6 years, substitute \( ext{Time} = 6 \) into the formula: \( ext{Rate} = rac{72}{6} \).

Step 3: Calculate the approximate interest rate using the formula. This will give you a rough estimate of the annual interest rate required for the savings to double in 6 years.

Step 4: Recognize that the Rule of 72 provides an approximation. For precise calculations, use the compound interest formula: \( A = P(1 + r)^t \), where \( A \) is the future value, \( P \) is the present value, \( r \) is the annual interest rate, and \( t \) is the time in years.

Step 5: Solve for \( r \) using the compound interest formula. Set \( A = 2P \) (since the savings need to double), \( t = 6 \), and rearrange the formula to isolate \( r \): \( r = (2)^{1/6} - 1 \). Use logarithms if necessary to simplify the calculation.