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 with 5 payments of $7,900 each, assuming an interest rate of 5.5% per period?

$34,463.13

$38,950.00

$36,186.29

$32,678.22

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Verified step by step guidance

Step 1: Understand the concept of an annuity due. An annuity due is a series of equal payments made at the beginning of each period. The present value (PV) of an annuity due is calculated by discounting these payments to their value at the start of the first period.

Step 2: Use the formula for the present value of an annuity due: 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 3: Substitute the given values into the formula. Here, Pmt = $7,900, r = 5.5% (or 0.055), and n = 5. Ensure you convert the interest rate to decimal form before using it in calculations.

Step 4: First, calculate the term (1 - (1 + r)^-n) / r. This involves raising (1 + r) to the power of -n, subtracting the result from 1, and dividing by r. This term accounts for the discounting of future payments.

Step 5: Multiply the result from Step 4 by Pmt and then multiply by (1 + r) to adjust for the fact that payments are made at the beginning of each period. This gives the present value of the annuity due.