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 (PV) of an annuity due consisting of 5 payments of \$2,500 each, with an interest rate of 5.5% per period?

\$10,500.00

\$10,991.25

\$11,570.73

\$12,500.00

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Verified step by step guidance

Step 1: Understand the problem. An annuity due means payments are made at the beginning of each period. The present value (PV) of an annuity due can be calculated using the formula: PV = Pmt × [(1 - (1 + r)^-n) / r] × (1 + r), where Pmt is the payment amount, r is the interest rate per period, and n is the number of payments.

Step 2: Identify the variables from the problem. Here, Pmt = 2500, r = 5.5% (or 0.055 as a decimal), and n = 5. These values will be substituted into the formula.

Step 3: Calculate the factor for the ordinary annuity portion of the formula: (1 - (1 + r)^-n) / r. This involves raising (1 + r) to the power of -n, subtracting the result from 1, and then dividing by r.

Step 4: Multiply the result from Step 3 by the payment amount (Pmt) to get the present value of an ordinary annuity.

Step 5: Adjust for the annuity due by multiplying the result from Step 4 by (1 + r). This accounts for the fact that payments are made at the beginning of each period rather than the end.