Time value of money

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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.
 

kirby

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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?"
 

DrStrangeLove

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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 (TMV) problems arise when you get money later in exchange for something today, or when you are depending on interest to make two sets of values equal. You can ignore TMV when the exchange and the payment are close in time; there's no exact rule about this, but usually if you're less than a year, you don't include TMV in a problem. On the other hand, if you're talking a set of payments over several years, you need to include TMV.

Look for: loans, bonds and notes over multiple years; sets of payments over several years; sinking funds; interest, discount and discounting. If you see these words, you usually have TMV somewhere in the problem.
 

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