https://www.principlesofaccounting.com/chapter-24/

Review as a peer based on the content of chapter 24

Post: A pressing concern for businesses writ large is how to best strategize for future growth. "Capital expenditure" decisions are made by businesses to invest in the projects and expenditures which will span many accounting periods. Managers assess the risk of the investment by accounting for the value of money over time; in any case, they will be keen to receive their money at the soonest time possible. The concept of the "time value of money" states just this: it is better to receive your money sooner rather than later. When money is invested sooner rather than later, the interest earned can be reinvested and continue to grow through the phenomenon of "compound interest. Accountants pay close attention to the "future value" to determine how much an investment will grow after a period of time, using the formula (1+i)^n. The "present value" is the reciprocal of the future value which indicates the investment necessary to produce a certain amount of money in the future, using the formula 1/(1+i)^n. Present value calculations are used to a great extent for assessing the necessary investment for annuities, which can come in the form of a stream of payments made at the beginning or end of each period.