Exam 15: Appendix: Accounting and the Time Value of Money

An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year?

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Question 1

Correct Answer:

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Present value of an annuity: $320,000 at n = 6; I = 5%
$320,000 × 5.07569 = $1,624,221 (rounded)
Financial calculator:
N = 6 I/Y = 5 PV = PMT = 320,000
PV = $1,624,221 (rounded)
Yes. Based on the financial aspects of the investment, it should be undertaken as the present value of $1,624,221 is greater than the initial investment.

Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%?

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Question 2

Correct Answer:

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Future value of a sum of $165,000,000 at n = 3 × 2 = 6; I = 6%/2 = 3%
$165,000,000 x 1.19405 = $197,018,250
Financial calculator:
N = (3 x 2) = 6 I/Y = (6/2) =3 PV = 165,000,000 PMT = 0 FV = ?
FV = $197,018,629 (rounded)
No. It will have $197.019 million accumulated, which is not enough to fund the health insurance.

Why is one dollar now worth more than one dollar in the future?

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Question 3

Correct Answer:

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A dollar received today is worth more than a dollar received two years ago.

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Question 4

Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.)

(Multiple Choice)

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Question 5

Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly?

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Question 6

Mr. Chips, Inc. wishes to accumulate $2,000,000 to be used to pay off a loan at the end of 10 years. How much will Mr. Chips deposit each year for 10 years (rounded to the nearest dollar), beginning at the end of the first year, to accumulate the desired amount if the investment earns an annual rate of 6%?

(Multiple Choice)

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Question 7

If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60.

(True/False)

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Question 8

Compute the future value for each of the following amounts. a. $200,000 invested today for 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $20,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually

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Question 9

When interest is earned on interest in a savings account in a bank, this is called compound interest.

(True/False)

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Question 10

Why is one dollar now worth more than one dollar in the future?

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Question 11

Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly?

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Question 12

If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested?

(Multiple Choice)

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Question 13

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually?

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Question 14

Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly?

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Question 15

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually?

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Question 16

Showing 1 - 16 of 16

An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year?

Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%?

Why is one dollar now worth more than one dollar in the future?

A dollar received today is worth more than a dollar received two years ago.

Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.)

Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly?

If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60.

When interest is earned on interest in a savings account in a bank, this is called compound interest.

Why is one dollar now worth more than one dollar in the future?

Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly?

If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested?

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually?

Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly?

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually?

Overview of Managerial Accounting

Managerial Accounting Concepts and Cost Flows

Cost Accounting Systems: Job Order Costing

Cost Accounting Systems: Process Costing

Activity-Based Costing

Cost-Volume-Profit Relationships

Variable Costing: A Tool for Decision Making

Relevant Costs and Short-Term Decision Making

Planning and Budgeting

Standard Costing and Variance Analysis

Flexible Budgets, Segment Analysis, and Performance Reporting

Capital Budgeting

Statement of Cash Flows

Analysis and Interpretation of Financial Statements

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