Exam 23: Understanding Time Value of Money Formulas and Concepts

The future value of $7,000 deposited today and compounded quarterly at a 16% annual interest rate for five years is

Compounding is the conversion of future cash flow amounts to their present value.

To determine an unstated interest rate, divide the future amount by the present value then divide by the number of periods.

The method of converting a future dollar amount into its present dollar value by removing the time value of money is called

Beginning December 31, 2014, ten equal, annual withdrawals are to be made. Required: Using the appropriate tables, determine the equal, annual withdrawals if $140,000 is invested on January 1, 2014 at an interest rate of 10% compounded annually.

When the present value of an annuity is calculated as of two or more periods before the payment of the first cash flow, the annuity is

On January 1, 2017, Jefferson Company completed arrangements to purchase a new piece of equipment. The agreement calls for equal annual payments on January 1 of each year for six years. The first payment of $7,500 is to be made on January 1, 2017. The interest rate is 12%. Required: Calculate the cost of the equipment to Jefferson Company.

Stephen Michaels wants to know how much he must deposit today at 12% interest to provide three equal annual withdrawals of $10,000, beginning one year from now. This is an example of the present value of

Samos Excavating is considering purchasing some new equipment for the company. Due to the expense involved, the equipment company is giving Samos the option of choosing between four different payments plans. 1) $500,000 due immediately in cash 2) $150,000 down payment due immediately; $60,000 per year for 10 years, beginning at the end of the current year 3) $150,000 down payment due immediately; $30,000 per year for 4 years beginning at the end of the current year; $80,000 per year for 8 years beginning at the end of the fourth year after the initial purchase 4) $65,000 due immediately and at the beginning of each of the next 11 years Required: Samos has to decide between the four payment plans, whichever one provides the smallest present value will be chosen. The effective interest rate during the future periods is 10%. Which option should Samos choose?

The future value of $50,000 deposited today and compounded quarterly at an 8% annual interest rate for seven years is

Raymond's Leasing Company signed an agreement to lease an asset that has a fair value of $800,000 on December 31, 2014. The lease will be paid in seven equal annual payments of $138,730, beginning on December 31, 2014. The interest rate included in the lease agreement is most nearly equal to

The future value of an amount depends on two variables: the interest rate and the number of payments

FASB's Statement of Financial Accounting Concepts No. 7 provides general principles governing the use of present value and the objectives of present value accounting measurements.

Match the appropriate equation with the correct terminology. 1) $= F V \times \frac { 1 } { ( 1 + i ) ^ { n } }$ 2) $= P V \times ( 1 + i ) ^ { n }$ 3) $= C \times \left[ \frac { 1 - \frac { 1 } { ( 1 + i ) ^ { n - 1 } } } { i } + 1 \right]$ 4) $= C \times \left[ \frac { 1 - \frac { 1 } { ( 1 + i ) ^ { n } } } { i } \right]$ 5) $= C \times \left[ \frac { ( 1 + i ) ^ { n } - 1 } { i } \right]$

The present value of an annuity is the present value of a series of equal cash flows that occur in the future.

Taylor would like to retire on December 31, 2026, and take a trip around the world. In order to do this, she feels she must accumulate $200,000 in her retirement account by that date. She is willing to deposit a certain amount each year into her retirement account, which earns 12% interest compounded annually. Taylor will make the first deposit on December 31, 2017, and the last deposit on December 31, 2026. Required: Determine the amount Taylor must deposit into her retirement account each year. Clearly label all work.

What is the difference between simple interest and compound interest?

Stacey has $5,000,000 on deposit in a fund that earns 9% interest compounded annually. How much can Stacey withdraw annually from the fund in ten equal annual withdrawals to completely deplete the fund after the tenth draw, assuming the first withdrawal occurs today?

Jeff desires to accumulate $13,603.83 by December 1, 2018. To accumulate that sum, he will make six equal semiannual deposits of $2,000, beginning on June 1, 2016, into a fund that earns interest compounded semiannually. What annual rate of interest must the fund provide to yield the desired sum?

An annuity due is an annuity for which the cash flows occur on the first day of each period.