Exam 6: Accounting and the Time Value of Money

On January 2, 2010, Wine Corporation wishes to issue $2,000,000 (par value) of its 8%, 10-year bonds.The bonds pay interest annually on January 1.The current yield rate on such bonds is 10%.Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

Jane wants to set aside funds to take an around the world cruise in four years.Assuming that Jane has $5,000 to invest today in an account expected to earn 6% per annum, how much will she have to spend on her vacation?

If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then

Use the following 8% interest factors for questions . -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?

What amount should be recorded as the cost of a machine purchased December 31, 2010, which is to be financed by making 8 annual payments of $6,000 each beginning December 31, 2011? The applicable interest rate is 8%.

What is the present value today of $6,000 to be received six years from today?

What amount will be in an 8% bank account three years from now if $6,000 is invested each year for four years with the first investment to be made today?

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 $2,000,000 of 11% bonds on March 1, 2010, due on March 1, 2025, 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?

Altman Company will invest $300,000 today.The investment will earn 6% for 5 years, with no funds withdrawn.In 5 years, the amount in the investment fund is

Jane wants to set aside funds to take an around the world cruise in four years.Jane expects that she will need $12,000 for her dream vacation.If she is able to earn 8% per annum on an investment, how much will she need to set aside at the beginning of each year to accumulate sufficient funds?

Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today?

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?

Reegan Company owns a trade name that was purchased in an acquisition of Hamilton Company.The trade name has a book value of $3,500,000, 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.) Reegan determines that the appropriate discount rate for this estimation is 6%.To the nearest dollar, what is the estimated fair value of the trade name?

Interest is the excess cash received or repaid over and above the amount lent or borrowed.

If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment?

If $4,000 is put in a savings account today, what amount will be available six years from now?

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

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

Ziggy is considering purchasing a new car.The cash purchase price for the car is $28,000.What is the annual interest rate if Ziggy is required to make annual payments of $6,500 at the end of the next five years?