Q18RQ - Horngren'S Financial And Managerial Accounting

Question

Explain the difference between the present value factor tables—Present Value of \(1 and Present Value of Ordinary Annuity of \)1.

Step-by-Step Solution

Answer

$\text{PV}=\text{FV}\frac{1}{{(1+\text{r})}^{\text{n}}}$

Step 1: Meaning of Present Value

A money-related calculation gauge of the worth of a future amount of cash or stream of installments in today's dollars adjusted for interest and inflation is known as present value. In other words, it compares the acquiring control of a future dollar to that of a current dollar.

Step 2: Difference between the present value factor tables-Present Value of $1 and Present Value of Ordinary Annuity of $1

The Present Value of $1 tableis used to calculate the value today of one future amount (a lump sum). The Present Value of an Annuity of $1 is used to calculate the value today of a series of equal future amounts (an annuity).