Exam 7: Accounting and the Time Value of Money

Which of the following must be known to compute the interest rate incurred from financing an asset purchased with an annuity?

For any discount rate and number of periods, the present value of an annuity due factor is always greater than the corresponding present value of an ordinary annuity factor.

Fanagi Corp. borrowed $57,000 from its bank at a 6% annual interest rate and will repay $182,807. Assume annual compounding. In approximately how many years will Fanagi repay the loan? Use the future value of $1 factor table shown below. Excerpt of Future Value of $1 Table Periods 1\% 2\% 3\% 4\% 5\% 6\% 1 1.01000 1.02000 1.03000 1.04000 1.05000 1.06000 2 1.02010 1.04040 1.06090 1.08160 1.10250 1.12360 3 1.03030 1.06121 1.09273 1.12486 1.15763 1.19102 4 1.04060 1.08243 1.12551 1.16986 1.21551 1.26248 5 1.05101 1.10408 1.15927 1.21665 1.27628 1.33823 10 1.10462 1.21899 1.34392 1.48024 1.62889 1.79085 20 1.22019 1.48595 1.80611 2.19112 2.65330 3.20714 25 1.28243 1.64061 2.09378 2.66584 3.38635 4.29187 30 1.34785 1.81136 2.42726 3.24340 4.32194 5.74349 35 1.41660 1.99989 2.81386 3.94609 5.51602 7.68609 40 1.48886 2.20804 3.26204 4.80102 7.03999 10.28572

Bobby's parents loaned him $60,000 to fund his college education. His parents are not charging interest. They desire to be paid one lump sum of $60,000 when Bobby can accumulate that amount. Bobby established a savings plan that earns 11% compounded annually. His new job promises to pay an annual holiday bonus that will enable him to make equal annual, year-end deposits of $6,800 starting next year. Approximately how many years will it take Bobby to accumulate the $60,000? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest year.)

The expected cash flow approach values an asset or liability using a range of estimated future cash flows times the probability of their occurrence discounted at the market rate of interest.

The PV (present value) function for a single sum in a Microsoft Excel spreadsheet requires inputting all of the following variables except ________.

An annuity due is a series of equal periodic payments made at the beginning of each period.

The present value of an annuity due for any given interest rate and number of periods is always less than the future value of an annuity due for the same interest rate and number of periods.

Terry Brown purchased a used car and agreed to pay $1,000 per month for two-and-a-half years with the first payment due at the end of the first month. What was the purchase price of the car assuming an annual rate of 12%? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

The selling price of a bond is equal to the present value of the interest payments plus the present value of the maturity value.

What is a deferred annuity?

You decide to deposit $1,000 at a local bank for two years at a 5% rate of interest compounded annually. What is the future value of your investment? (Use the future value of $1 factor table provided). Excerpt of Future Value of $1 Table Periods 5\% 1 1.05 2 1.10 3 1.16 4 1.22 5 1.28 6 1.34 7 1.41 8 1.48 9 1.55 10 1.63 11 1.71 12 1.80

Leberland Corporation deposits $125,000 every year in a savings account (beginning at the end of the current year) for the next six years so that it can purchase a new piece of machinery at the end of six years. The interest rate is 6%. How much money will Leberland Corporation have at the end of six years? Use the future value of an ordinary annuity factor table shown below to derive your answer. Excerpt from future value of an ordinary annuity factor table Periods 3\% 4\% 5\% 6\% 1 1.00000 1.00000 1.00000 1.00000 2 2.03000 2.04000 2.05000 2.06000 3 3.09090 3.12160 3.15250 3.18360 4 4.18363 4.24646 4.31013 4.37462 5 5.30914 5.41632 5.52563 5.63709 6 6.46841 6.63298 6.80191 6.97532 7 7.66246 7.89829 8.14201 8.39384 8 8.89234 9.21423 9.54911 9.89747 9 10.15911 10.58280 11.02656 11.49132 10 11.46338 12.00611 12.57789 13.18079

Which of the following tables would show the smallest value for an interest rate of 8% for ten periods?

You have discovered an investment opportunity that earns a 6% rate of interest compounded semiannually. What amount should you deposit today to have $4,000 in three years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

The present value of a four-year ordinary annuity for which the first payment is deferred for five years (not received until year six) is equal to the present value of a nine-year ordinary annuity minus the present value of a five-year ordinary annuity.

For any specific number of periods, the present value factor for a single sum decreases as the discount rate increases.

How is the effective interest rate determined?

Maddie's Place Corporation deposits $100,000 at the beginning of every quarter in a savings account for the next six years so that it can purchase a new piece of machinery at the end of six years. The interest rate is 8%. How much money will Maddie's Place Corporation have at the end of six years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

Simple interest on a $620,000, 6%, 18-month note is ________.