Multiple Choice
What is the present value of an ordinary annuity of \$400 invested each year for 12 years at an annual interest rate of 6%? (Round your answer to the nearest dollar.)
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Why is a dollar received today worth more than a dollar received in the future?
A
Because future dollars are taxed at a higher rate than current dollars.
B
Because inflation always decreases the value of money in the future.
C
Because accounting standards require present dollars to be reported at a premium.
D
Because a dollar today can be invested to earn interest, increasing its future value.
Verified step by step guidance1
Understand the concept of the time value of money, which states that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity.
Recognize that the earning capacity comes from the ability to invest the dollar today and earn interest over time, increasing its future value.
Learn the formula for future value (FV) to quantify this concept: FV = PV × (1 + r)^n, where PV is the present value, r is the interest rate, and n is the number of periods.
Consider factors like inflation and opportunity cost, which also contribute to the preference for receiving money today rather than in the future.
Understand that this principle is fundamental in financial decision-making, including investment analysis, loan calculations, and valuation of cash flows.
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