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Horngren'S Financial And Managerial Accounting
Found in: Page 655

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Short Answer

Explain each of the key factors that the time value of money depends on.

The three key factors of the time value of money are principal, number of period and interest rate.

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Step by Step Solution

Step 1: Definition of the time value of money

The invested cash that earns interest over time is called the time value of money.

Step 2: Key factor

The time value of money depends on three factors

  1. Principal: The principal is the invested or borrowed amount. The amount of principal is invested in a single payment or in annuity form.
  2. Number of periods: The number of periods is the duration of the investment from start to end of the investment. Return on the investment directly depends on the number of periods. If the number of periods is low then the rate of return is low and vice versa.
  3. Interest Rate: Interest is the percentage of the return earned on the interest. The interest rate can be calculated in days, weeks, months, or years. The interest rate is reflected by the number of periods.

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