Exam 6: Accounting and the Time Value of Money

Present value and future value computations. Part (a) Compute the amount that a $40,000 investment today would accumulate at 10% (compound interest) by the end of 6 years. Part (b) Tom wants to retire at the end of this year (2014). His life expectancy is 20 years from his retirement. Tom has come to you, his CPA, to learn how much he should deposit on December 31, 2014 to be able to withdraw $60,000 at the end of each year for the next 20 years, assuming the amount on deposit will earn 8% interest annually. Part (c) Judy Thomas has a $2,100 overdue debt for medical books and supplies at Joe's Bookstore. She has only $700 in her checking account and doesn't want her parents to know about this debt. Joe's tells her that she may settle the account in one of two ways since she can't pay it all now: 1. Pay $700 now and $1,750 when she completes her residency, two years from today." 2. Pay $2,800 one year after completion of residency, three years from today.Assuming that the cost of money is the only factor in Judy's decision and that the cost of money to her is 8%, which alternative should she choose? Your answer must be supported with calculations."

On January 1, 2014, Kline Company decided to begin accumulating a fund for asset replacement five years later. The company plans to make five annual deposits of $50,000 at 9% each January 1 beginning in 2014. What will be the balance in the fund, on January 1, 2019 (one year after the last deposit)? The following 9% interest factors may be used.Present Value of Future Value of

Items 65 through 68 apply to the appropriate use of interest tables. Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually. -What amount will be in a bank account three years from now if $8,000 is invested each year for four years with the first investment to be made today?

Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost $800,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?

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

Vannoy Corporation will invest $60,000 every January 1st for the next six years (2014 - 2019). If Vannoy will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?

What interest rate (the nearest percent) must Charlie earn on a $226,000 investment today so that he will have $570,000 after 12 years?

John won a lottery that will pay him $250,000 at the end of each of the next twenty years. Assuming an appropriate interest rate is 8% compounded annually, what is the present value of this amount?

What is the primary difference between an ordinary annuity and an annuity due?

Tipson Corporation will invest $20,000 every January 1st for the next six years (2014 - 2019). If Tipson will earn 12% on the investment, what amount will be in the investment fund on December 31, 2019?

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?

Assume ABC Company deposits $70,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?