Exam 15: The Time Value of Money

-Kaitlin is contemplating investing in Cocoa Beach Tans. She estimates that the company will pay the following dividends per share at the end of the next four years and that the current price of the company's common stock, which is $100 per share, will remain unchanged. If Kaitlin wants to earn 12 percent on her investment and plans to sell the investment at the end of the fourth year, how much would she be willing to pay for one share of common stock? (Round all calculations to the nearest cent.)

Which timing of payments is true for an ordinary annuity?

An annuity due and an ordinary annuity have equal payments, the same interest rates, and the amount of time between the payments is equal. Which statement is true?

-Mitch has been offered three different contracts for a service he provides. Contract 1: $9,000 received at the beginning of each year for ten years, compounded at a 6 percent annual rate. Contract 2: $9,000 received today and $20,000 received ten years from today. The relevant interest rate is 12 percent. Contract 3: $9,000 received at the end of Years 4, 5, and 6. The relevant annual interest rate is 10 percent. What is the present value of Contract 2?

Critical Thinking AICPA FN: Measurement -Middlesex Enterprises plans to issue $120,000 of 10-year, 6% bonds. The effective yield at the time of issuance is 8%. A. How much will the bonds sell for in the market if interest is paid annually? B. How much will the bonds sell for in the market if interest is paid semi-annually?

Explain the concept of the "time value of money."

How does inflation affect the value of money over time?

-Thomas Young invested $15,000 at 10% annual interest and left the money invested without withdrawing any of the interest for 15 years. At the end of the 15 years, Thomas decided to withdraw the accumulated amount of money. Thomas has found the following values in various tables related to the time value of money. To the closest dollar, which amount would he withdraw, assuming that the investment earns interest compounded annually?

Critical Thinking AICPA FN: Measurement -You deposited $4,000 per year annually starting on January 1, 2008 in a bank account which earns 10%. How much will accumulate by December 31, 2011, the date of the final payment?

The phone rings. You answer, "Hello." Is this Billy Bob?" "Yes, it is." "This is Ed McMahon. Congratulations! You have just won the Just Kidding Clearing House sweepstakes! How would you like us to pay you?" You ponder over the best choice of accepting your winnings: 1. Equal payments of $250,000 at the end of each year for twenty years 2. A lump-sum payment of $2,400,000 today 3. A lump-sum payment of $100,000 today and payments of $400,000 at the end of every year for 10 years All earnings can be invested at 10 percent. Make a choice of one of the three options. Show calculations.

-Turner Company is considering an investment, which will return a lump sum of $450,000 four years from now. Below is some of the time value of money information that Turner has compiled that might help in planning compounded interest decisions. To the closest dollar, what amount should Turner Company pay for this investment to earn a 10% return?

-Mitch has been offered three different contracts for a service he provides. What is the present value of Contract 1?

How much would you deposit today in a savings account that earns 10%, in order that you can make equal annual withdrawals of $1,200 each at the end of each of the next 15 years?

-Mitch has been offered three different contracts for a service he provides. Contract 1: $9,000 received at the beginning of each year for ten years, compounded at a 6 percent annual rate. Contract 2: $9,000 received today and $20,000 received ten years from today. The relevant interest rate is 12 percent. Contract 3: $9,000 received at the end of Years 4, 5, and 6. The relevant annual interest rate is 10 percent. What is the present value of Contract 3?

Calculate the future value of equal semiannual payments of $9,000 at 12% compounded semiannually for 4 years. The answer is

-Gaynor Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $25,000; Year 2, $45,000; Year 3, $60,000. Below is some of the time value of money information that Gaynor has compiled that might help them in their planning and compounded interest decisions. Gaynor requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Gaynor should pay for the equipment?

To determine how much must be deposited in the bank today so that you can withdraw 6 annual payments beginning one year from now, which interest factor will you need?

-How much must be invested now to receive $10,000 per year for ten years if the first $10,000 is received today and the rate is 10%?

Sierra Capital wants to accumulate $100,000 at the end of 10 years to fund retirement benefits for its accountant. Annual deposits will be made into a special account earning 6%, beginning at the end of year 1. To calculate the amount of the equal deposits, use the

Critical Thinking AICPA FN: Measurement -Ocean Corporation purchased a machine with a cash price of $35,000. Payments will be made at the end of every quarter for 30 payments beginning at the end of each quarter. The machine was financed at 12%. How much is each payment?