Exam 6: Time Value of Money Concepts

Davenport Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what single sum at the employment date would make her indifferent between the two options? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Present and future value tables of $1 at 3% are presented below: -Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?

Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.

ABC Company will issue $5,000,000 in 6%, 10-year bonds when the market rate of interest is 8%. Interest is paid semiannually. Required: Determine how much cash ABC Company will realize from the bond issue.

Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate. Required: For each situation determine the amount recorded as a liability by the lessee at the beginning of the lease.

Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is:

With an annuity due, a payment is made or received on the date the agreement begins.

Briefly describe the difference between simple interest and compound interest.

Present and future value tables of $1 at 9% are presented below. -Mustard's Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

Compute the future value of the following invested amounts at the specified periods and interest rates.

Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?

Which of the following must be known in order to compute the interest rate when financing an asset purchase with an annuity?

With an ordinary annuity, a payment is made or received on the date the agreement begins.

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

Diablo Company leased a machine from Juniper Corporation on January 1, 2018. The machine has a fair value of $20,000,000. The lease agreement calls for four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. The appropriate interest rate for this lease is 10%. Other information: PV of an ordinary annuity @10% for 4 periods: 3.16987 PV of an annuity due @ 10% for 4 periods: 3.48685 Required: Determine the amount of each lease payment.

JKL Company will issue $2,000,000 in 12%, 10-year bonds when the market rate of interest is 10%. Interest is paid semiannually. Required: Determine how much cash JKL Company should realize from the bond issue.

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to fund a savings account at the beginning of each year during that period for which it expects to earn 8% annually. At the end of the five years, there will be enough money in the account to pay off the bonds. What amount does Fenland need to invest each year?

Present and future value tables of $1 at 3% are presented below: -Micro Brewery borrows $300,000 to be repaid in equal installments over a period of three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

Present and future value tables of $1 at 3% are presented below: -At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

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 wants to pay off the 7.75% notes on December 31, 2018, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only) on this date in order to satisfy the noteholders?