Exam 6: Time Value of Money Concepts

Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold at the end of 10 years for $10,000. Interest is at 10%. Assume the machine purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine whether Baird should purchase the machine.

On the last day of its fiscal year ending December 31, 2018, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2038 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2019. 2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2019. Lease B also is for 10 years, beginning January 1, 2019. Terms of the lease require seven annual lease payments of $60,000 beginning on January 1, 2022. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations. Required: What amounts will appear in Boatright's December 31, 2018, balance sheet for the bonds and for the leases?

Pockets lent $20,000 to Lego Construction on January 1, 2018. Lego signed a three-year, 5% installment note to be paid in three equal payments at the end of each year. Required: Calculate the amount of one installment payment.

Present and future value tables of $1 at 9% are presented below. -How much must be invested now at 9% interest to accumulate to $10,000 in five years?

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be:

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:

Present and future value tables of $1 at 9% are presented below. -LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

Below are excerpts from time value of money tables for the 8% rate. -Column 4 is an interest table for the:

Present and future value tables of $1 at 3% are presented below: -Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?

Present and future value tables of $1 at 9% are presented below. -How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

Present and future value tables of $1 at 3% are presented below: -Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today?

Present and future value tables of $1 at 3% are presented below: -On January 1, 2018, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2021. You are eager to earn 3%. What is the present value of the investment on January 1, 2018?

GHI Company will issue $2,000,000 in 8%, 10-year bonds when the market rate of interest is 6%. Interest is paid semiannually. Required: Determine how much cash GHI Company should realize from the bond issue.

Present and future value tables of $1 at 3% are presented below: -On January 1, 2018, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2020. You are eager to earn 3%. What is the present value of the investment on January 1, 2018?

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following: Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date. Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following: -Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2018, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over only the principal payment on Healdsburg's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

Present and future value tables of $1 at 3% are presented below: -At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. Interest is at 8%. Ignore income taxes. Required: Determine which option should be chosen based on present value considerations.

Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

A deferred annuity is one in which interest charges are deferred for a stated time period.