Exam 14: Time Value of Money

In order to compute the present value of an annuity, it is necessary to know the 1.discount rate.2.number of discount periods and the amount of the periodic payments or receipts.

Dexter Company is considering purchasing equipment.The equipment will produce the following cash flows: Dexter requires a minimum rate of return of 10%.What is the maximum price Dexter should pay for this equipment?

If the single amount of $3,000 is to be received in three years and discounted at 6%, its present value is

Bill Cigarettes acquired a bad habit of smoking in high school.Bill spends approximately $70 a month or $840 a year on cigarettes.He is not concerned with health issues, but he is keenly aware of financial issues.Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking.

If the single amount of $2,000 is to be received in two years and discounted at 11%, its present value is

Robin Clark buys one avocado each week (4 per month) at an average cost of $2.50 per avocado.Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of buying avocados.

The process of determining the present value is referred to as discounting the future amount.

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.

Which of the following accounting problems does not involve a present value calculation?

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

The present value of $10,000 to be received in five years will be smaller if the discount rate is

Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their recently born granddaughter, Sloane Martin.They will make these deposits on December 31st of each year.Bill and Ellen feel they can safely earn 8%.How much will be in this account on December 31 of the 18th year?

Suzy Douglas has been offered the opportunity of investing $73,540 now.The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy.How many years must Suzy wait to receive the $200,000?

Peter Johnson invests $35,516.80 now for a series of $5,000 annual returns beginning one year from now.Peter will earn 10% on the initial investment.How many annual payments will Peter receive?

In present value calculations, the process of determining the present value is called

John Reynolds deposited $10,000 in an account paying interest of 4% compounded annually.What amount will be in the account at the end of four years?

Compound interest is the return on principal

Lamb Company deposited $15,000 annually for six years in an account paying 5% interest compounded annually.What is the balance of the account at the end of the 6th year?

If Sloane Joyner invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment?

All of the following are necessary to compute the future value of a single amount except the