Exam 6: Time Value of Money Concepts

Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%. Required: a. How much has accumulated in Sosa's deferred compensation account? b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years? c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?

Sondra deposits $2,000 in an IRA account on April 15, 2013. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2023?

Compound interest includes interest earned on interest.

On May 1, 2013, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in zero-coupon bonds that mature on May 1, 2031. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. Required: Calculate the price Bo paid for the bonds.

Suppose that Healdsburg renegotiates the 8% notes on December 31, 2018, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2019, rather than pay the annual interest payments and the $225 million in a lump sum at maturity. What would the annual payments be?

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

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

MBI Company's largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%. Required: a. Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease. b. Compute the amount of interest income earned by MBI for the first year of the lease.

Briefly describe the difference between simple interest and compound interest.

An investment product promises to pay $42,000 at the end of 10 years. If an investor feels this investment should produce a rate of return of 12%, compounded annually, what's the most the investor should be willing to pay for the investment?

Provide two examples of the use of present value techniques in accounting.

Column 2 is an interest table for the:

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

On January 1, 2013, Glanville Company sold goods to Otter Corporation. Otter signed a noninterest-bearing note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2013. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2013 of:

Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?

Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?

Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?

Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for five years. Interest is 8%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

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.