Exam 6: Accounting and the Time Value of Money

If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the present value of the annuity due will be greater than the present value of the ordinary annuity.

Techtronics, a technology company that uses IFRS for its financial reporting, has been found to have polluted the property surrounding its plant. The property is leased for 12 years and Techtronics has agreed that when the lease expires, the pollution will be remediated before transfer back to its owner. The lease has a renewal option for another 8 years. If this option is exercised, the cleanup will be done at the end of the renewal period. There is a 70% chance that the lease will not be renewed and the cleanup will cost €240,000. There is 30% chance that the lease will be renewed and the cleanup costs will be €500,000 at the end of the 20 years. If you assume that these estimates are derived from best estimates of likely outcomes and the risk-free rate is 5%, the expected present value of the cleanup provision is

What would you pay for an investment that pays you €24,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.

Which of the following is true?

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of £42,000 for 15 years and to have a resale value of £80,000 at the end of that period. Assume a 10% rate and earnings at year end. The present value of 1 at 10% for 15 periods is .23939. The present value of an ordinary annuity at 10% for 15 periods is 7.60608. The future value of 1 at 10% for 15 periods is 4.17725.

Lucy and Fred want to begin saving for their baby's college education. They estimate that they will need €300,000 in eighteen years. If they are able to earn 5% per annum, how much must be deposited at the end of each of the next eighteen years to fund the education?

On January 1, 2019, Ott Co. sold goods to Flynn Company. Flynn signed a zero-interest-bearing note requiring payment of €100,000 annually for seven years. The first payment was made on January 1, 2019. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:

What is the relationship between the present value factor of an ordinary annuity and the present value factor of an annuity due for the same interest rate?

The future value of an annuity due factor is found by multiplying the future value of an ordinary annuity factor by 1 minus the interest rate.

On January 1, 2018, Kline Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of £80,000 at 9% each January 1 beginning in 2018. What will be the balance in the fund, within $10, on January 1, 2023 (one year after the last deposit)? The following 9% interest factors may be used.

Garretson Corporation will receive £15,000 today (January 1, 2017), and also on each January 1st for the next five years (2018 - 2022). What is the present value of the six £15,000 receipts, assuming a 12% interest rate?

Present value is the value now of a future sum or sums discounted assuming compound interest.

Jane wants to set aside funds to take an around the world cruise in four years. Assuming that Jane has €8,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation?

Which table would show the largest factor for an interest rate of 8% for five periods?

The present value of an annuity due table is used when payments are made at the end of each period.

Paula purchased a house for €300,000. After providing a 20% down payment, she borrowed the balance from the local savings and loan under a 30-year 6% mortgage loan requiring equal monthly installments at the end of each month. Which time value concept would be used to determine the monthly payment?

Which of the following tables would show the smallest factor for an interest rate of 10% for six periods?

The future value of a single sum is determined by multiplying the future value factor by its present value.

Mordica Company will receive €200,000 in 7 years. If the appropriate interest rate is 10%, the present value of the €200,000 receipt is

James leases a ski chalet to his best friend, Janet. The lease term is five years with €33,000 annual payments due at the beginning of each year. What is the present value of the payments discounted at 8% per annum?