Multiple Choice
The relationship between the present value (PV) and the investment time period, assuming a positive interest rate, is best described as:
151
views
10. Time Value of Money
Time Value of Money Equations
Multiple Choice
In order to discount multiple cash flows to the present, one would use:
A
the present value of an ordinary annuity formula
B
the future value of a single sum formula
C
the current ratio formula
D
the straight-line depreciation method
Verified step by step guidance1
Understand the concept of discounting cash flows: Discounting cash flows involves determining the present value of future cash flows by applying a discount rate. This is essential in financial accounting to evaluate the value of money over time.
Identify the correct formula for discounting multiple cash flows: The present value of an ordinary annuity formula is used when there are multiple cash flows of equal amounts occurring at regular intervals.
Recall the formula for the present value of an ordinary annuity: The formula is \( PV = C \times \frac{1 - (1 + r)^{-n}}{r} \), where \( PV \) is the present value, \( C \) is the cash flow per period, \( r \) is the discount rate per period, and \( n \) is the number of periods.
Compare the other options provided: The future value of a single sum formula calculates the value of a single cash flow at a future date, the current ratio formula measures liquidity, and the straight-line depreciation method is used for allocating the cost of an asset over its useful life. None of these are relevant for discounting multiple cash flows.
Conclude that the present value of an ordinary annuity formula is the correct choice for discounting multiple cash flows to the present.
Related Videos
Related Practice
