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 receiving $500 at the end of each year for 10 years, assuming a discount rate of 5% per year?

$5,000.00

$3,855.43

$3,250.00

$4,322.50

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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 stream of cash flows, discounted at a specific rate. In this case, we are calculating the present value of an annuity (receiving $500 annually for 10 years) using a discount rate of 5%.

Step 2: Use the formula for the present value of an ordinary annuity: PV = C × [(1 - (1 + r)^(-n)) / r], where C is the annual cash flow ($500), r is the discount rate (5% or 0.05), and n is the number of years (10).

Step 3: Substitute the given values into the formula. Replace C with 500, r with 0.05, and n with 10. The formula becomes: PV = 500 × [(1 - (1 + 0.05)^(-10)) / 0.05].

Step 4: Break down the calculation into smaller parts. First, calculate (1 + r), which is (1 + 0.05) = 1.05. Then, raise 1.05 to the power of -10, which is (1.05)^(-10). Subtract this result from 1 to compute (1 - (1.05)^(-10)). Finally, divide this value by the discount rate (0.05).

Step 5: Multiply the result from Step 4 by the annual cash flow ($500) to find the present value of the annuity. This will give you the present value of receiving $500 at the end of each year for 10 years at a 5% discount rate.