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

All else constant, which one of the following will result in the lowest present value of a lump sum?

A lower discount rate

A shorter time period until receipt

Receiving the lump sum today

A higher discount rate

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Verified step by step guidance

Understand the concept of present value: Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return (discount rate). The formula for present value is PV = \( \frac{FV}{(1 + r)^t} \), where FV is the future value, r is the discount rate, and t is the time period.

Analyze the impact of the discount rate: A higher discount rate increases the denominator \((1 + r)^t\), which reduces the present value. Conversely, a lower discount rate decreases the denominator, resulting in a higher present value.

Evaluate the impact of time period: A shorter time period (t) reduces the exponent in \((1 + r)^t\), which increases the present value. A longer time period increases the exponent, reducing the present value.

Consider receiving the lump sum today: If the lump sum is received today, there is no discounting applied (t = 0), and the present value equals the future value. This results in the highest present value.

Conclude that a higher discount rate results in the lowest present value: Among the options provided, a higher discount rate has the most significant impact in reducing the present value of a lump sum.