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

London Motors offers to sell a $24,000 car for $470 per month over 60 months. Using the time value of money equation for an ordinary annuity, what is the approximate monthly interest rate (rounded to the nearest tenth of a percent)?

0.8%

1.0%

1.2%

1.5%

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Verified step by step guidance

Step 1: Understand the problem. The question involves calculating the monthly interest rate for an ordinary annuity using the time value of money equation. The car's price ($24,000) is the present value (PV), the monthly payment ($470) is the annuity payment (PMT), and the number of months (60) is the total number of periods (n). The goal is to find the monthly interest rate (r).

Step 2: Recall the formula for the present value of an ordinary annuity: $ PV = PMT \times \frac{1 - (1 + r)^{-n}}{r} $. Here, PV is the present value, PMT is the monthly payment, r is the monthly interest rate, and n is the number of periods.

Step 3: Rearrange the formula to isolate the monthly interest rate (r). This involves iterative or trial-and-error methods since the equation is nonlinear and cannot be solved algebraically for r. Alternatively, financial calculators or software can be used to approximate r.

Step 4: Substitute the known values into the formula: $ 24000 = 470 \times \frac{1 - (1 + r)^{-60}}{r} $. Use trial-and-error or a financial calculator to find the value of r that satisfies the equation.

Step 5: Once the monthly interest rate (r) is determined, round it to the nearest tenth of a percent as specified in the problem. The correct answer is approximately 1.2%.