Exam 6: Accounting and the Time Value of Money

On December 30, 2014, AGH, Inc. purchased a machine from Grant Corp. in exchange for a zero-interest-bearing note requiring eight payments of $90,000. The first payment was made on December 30, 2014, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: On AGH's December 31, 2014 balance sheet, the net note payable to Grant is

Compound interest, rather than simple interest, must be used to properly evaluate long- term investment proposals.

On May 1, 2014, a company purchased a new machine which it does not have to pay for until May 1, 2016. The total payment on May 1, 2016 will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor?

Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?

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

What is interest?

How much must be invested now to receive $30,000 for 15 years if the first $30,000 is received today and the rate is 9%?

What would you pay for an investment that pays you $2,500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

Renfro Corporation will invest $70,000 every December 31st for the next six years (2014 - 2019). If Renfro will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?

Stemway Company requires a new manufacturing facility. It found three locations; all of which would provide the 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?

What is the relationship between the future value of one and the present value of one?

If the compounding period is less than one year, the annual interest rate must be converted to the compounding period interest rate by dividing the annual rate by the number of compounding periods per year.

Finding the implied interest rate. Bates Company has entered into two lease agreements. In each case the cash equivalent purchase price of the asset acquired is known and you wish to find the interest rate which is applicable to the lease payments. InstructionsCalculate the implied interest rate for the lease payments.Lease A - Lease A covers office equipment which could be purchased for $126,168. Bates Company has, however, chosen to lease the equipment for $35,000 per year, payable at the end of each of the next 5 years.Lease B - Lease B applies to a machine which can be purchased for $134,141. Bates Company has chosen to lease the machine for $28,000 per year on a 6-year lease. Payments are due at the start of each year.

Milner Company will invest $500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Charlie Corp. is purchasing new equipment with a cash cost of $250,000 for an assembly line. The manufacturer has offered to accept $57,400 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

What would you pay for an investment that pays you $30,000 at the end of each year for the next ten years and then returns a maturity value of $450,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.

What would you pay for an investment that pays you $30,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.

The market price of an $800,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is

Jamison Company uses IFRS for its financial reporting. It produces machines that sell globally. All sales are accompanied by a one-year warranty. At the end of the year, the company has the following data: $\bullet$ 3,000 units were sold during the year. $\bullet$ The trend over the past five years has been that 4% of the machines were defective in some way and had to be repaired. Of this 4%, half required a full replacement at a cost of $3,000 per unit and half were able to be repaired at an average cost of $300.What is the expected value of the warranty cost provision?

On January 1, 2014, Ball Co. exchanged equipment for a $500,000 zero-interest-bearing note due on January 1, 2017. The prevailing rate of interest for a note of this type at January 1, 2014 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 2015 income statement?