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Effects of time value of money concepts used in accounting

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What does the time value of money mean? Why is this concept important in accounting? Under what circumstances would we use the time value of money calculations?

When might we use present value calculations? When might we use future value calculations? Which is more likely to be used in accounting? Why?

What effect do interest rates have on the calculation of future and present value? How does the length of time affect future and present value? How do these two factors correlate?

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What does the time value of money mean? Why is this concept important in accounting? Under what circumstances would we use the time value of money calculations?

The time value of money means that the timing of cash flows matters. Money received now is worth more than money received later because the money you have now may be invested at some rate of interest (larger than zero) and it will grow to more in later period. It is the opportunity to earn interest on current balances that give it more value that future amounts.

We will use time value of money computations when the timing of expected cash flows is distributed over future periods. In other words, if the cash is not expected to be received in the current period, you may need to figure out how much it is worth in ...

Solution Summary

Your response is 462 words and explains time value of money, the types of issues that need present value, the types of issues that need future value and the effect of interest rates and number of periods on present value.

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Hopeful House, a nonprofit orgnanization serving the Big City community, is considering building a playground. It needs to rationally convince the Community Chest that its project is worthy of a special grant by calculating the present value of future benefits. The financial manager estimates future benefits of the playground at $10,000 that will be realized at the end of a four year period. Further, he recommends using a discount rate of 9%. His executive director thinks that his discount rate is too high and she recommends using 8%. The Community Chest associate, however, insists both rates are too low and wants them to use 10%. Calculate the present value of the estimated benefit stream at all three discount rates. Explain the effect of higher and lower discount rates.

Hint: Please see attached file

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