Hi everyone! I’m literally trapped by intermediate accounting, especially when it comes to “time value of money”. Well here is my question: How to recognize if a question requires “present value of ordinary annuity” or It mentions to “future value of ordinary annuity”? I’m unable to understand it! I found things like if the question says “deposit” it means “ FV-OA” and if it says “pay” it means “PV-OA” is it true? I’de be thankful for any helps.
Time value of money
- Thread starter Nazanin
- Start date
Unfortunately, there is no magic wand for this. What has to happen is that you must very carefully read and understand the problem to see what is being asked for. A problem like" You have won the lottery and will get $xx every year for 20 years when the interest rate is YY%- so how much is that worth now?" Looking at the word "now" tells you to use PV-OA.
Whereas a problem that says how much should you deposit each year at YY% interest to have $xx in 10 years is asking for use of the FV-OA formula to get the annual deposit amount. Plus after you do the calculations look at the answer you got and ask yourself "Does this answer make sense?"
Whereas a problem that says how much should you deposit each year at YY% interest to have $xx in 10 years is asking for use of the FV-OA formula to get the annual deposit amount. Plus after you do the calculations look at the answer you got and ask yourself "Does this answer make sense?"