Exam 6: Accounting and the Time Value of Money

The rate used to discount the expected cash flows when using the expected cash flow approach includes an adjustment for credit risk.

A machine is purchased by making payments of €15,000 at the beginning of each of the next five years. The interest rate was 10%. The future value of an ordinary annuity of 1 for five periods at 10% is 6.10510. The present value of an ordinary annuity of 1 for five periods is 3.79079. What was the cost of the machine?

Al Darby wants to withdraw £20,000 (including principal) from an investment fund at the end of each year for five years. How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

The future value of a deferred annuity is less than the future value of an annuity not deferred.

Moore Industries manufactures exercise equipment. Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's exercise equipment. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing £3,000,000 of 11% bonds on March 1, 2018, due on March 1, 2033, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. What is the selling price of the bonds?

Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

How much must be invested now to receive €20,000 for 15 years if the first €20,000 is received today and the rate is 9%?

Under IFRS, if an estimate is being developed for a large number of items with varied outcomes, then the expected cash flow approach is used.

Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company. The trade name has a book value of €5,250,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Reegan must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Reegan's estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.)

Tipson Corporation will invest €30,000 every January 1st for the next six years (2018 - 2023). If Linton will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

In determining present value, a company moves backward in time using a process of accumulation.

If €3,000 is put in a savings account today, what amount will be available three years from today?

John Jones won a lottery that will pay him €2,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

Charlie Corp. is purchasing new equipment with a cash cost of £125,000 for the assembly line. The manufacturer has offered to accept £28,700 payments at the end of each of the next six years. What is the interest rate that Charlie Corp. will be paying?

Pearson Corporation makes an investment today (January 1, 2018). They will receive €25,000 every December 31st for the next six years (2018 - 2023). If Pearson wants to earn 12% on the investment, what is the most they should invest on January 1, 2018?

What would you pay for an investment that pays you £500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

Stemway requires a new manufacturing facility. Management found three locations; all of which would provide needed capacity, the only difference is the price. Location A may be purchased for £500,000. Location B may be acquired with a down payment of £100,000 and annual payments at the end of each of the next twenty years of £50,000. Location C requires £40,000 payments at the beginning of each of the next twenty-five years. Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly to the company?

Which of the following tables would show the smallest value for an interest rate of 5% for six periods?

Which of the following is false?

On January 1, 2018, Ball Co. exchanged equipment for a £200,000 zero-interest-bearing note due on January 1, 2021. The prevailing rate of interest for a note of this type at January 1, 2018 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2019 income statement?