Deck 26: Time Value of Money

Question 1

Which of the following is not necessary to know in computing the future value of an annuity?

A) Amount of the periodic payments
B) Interest rate
C) Number of compounding periods
D) Year the payments begin

Answer 1

D

Question 2

If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years?

A) $48,867
B) $315,000
C) $377,337
D) $450,000

Answer 2

C

Question 3

Interest is the difference between the amount borrowed and the principal.

Answer 3

False

Question 4

The future value of an annuity factor for 2 periods is equal to

A) 1 plus the interest rate.
B) 2 plus the interest rate.
C) 2 minus the interest rate.
D) 2.

Question 5

The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.

Question 6

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

A) interest rate.
B) number of periods.
C) principal.
D) maturity value.

Question 7

Compound interest is the return on principal

A) only.
B) for one or more periods.
C) plus interest for two or more periods.
D) for one period.

Question 8

With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.

Question 9

The present value of a long-term note or bond is a function of two variables.

Question 10

The factor 1.0609 is taken from the 3% column and 2 periods row in a certain table. From what table is this factor taken?

A) Future value of 1
B) Future value of an annuity of 1
C) Present value of 1
D) Present value of an annuity of 1

Question 11

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

Question 12

Which table has a factor of 1.00000 for 1 period at every interest rate?

A) Future value of 1
B) Future value of an annuity of 1
C) Present value of 1
D) Present value of an annuity of 1

Question 13

If $40,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years?

A) $32,878
B) $48,000
C) $48,620
D) $48,666

Question 14

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

Question 15

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.

Question 16

A higher discount rate produces a higher present value.

Question 17

McGoff Company deposits $20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying

A) $20,000 by the future value of 1 factor.
B) $100,000 by 1.04.
C) $100,000 by 1.20.
D) $20,000 by the future value of an annuity factor.

Question 18

The future value of 1 factor will always be

A) equal to 1.
B) greater than 1.
C) less than 1.
D) equal to the interest rate.

Question 19

The present value of an annuity is the value now of a series of future receipts or payments, discounted assuming compound interest.

Question 20

Compound interest is computed on the principal and any interest earned that has not been paid or received.

Question 21

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is

A) $2,518,860.
B) $2,591,520.
C) $2,670,000.
D) $3,000,000.

Question 22

Present value is based on

A) the dollar amount to be received.
B) the length of time until the amount is received.
C) the interest rate.
D) All of these answers are correct.

Question 23

If you are able to earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now?

A) $27,747
B) $27,778
C) $27,273
D) $29,700

Question 24

The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is

A) $1,200.
B) $4,484.
C) $4,477.
D) $4,200.

Question 25

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.

A) 1
B) 2
C) both 1 and 2
D) something in addition to 1 and 2

Question 26

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

A) allocating.
B) pricing.
C) negotiating.
D) discounting.

Question 27

If you are able to earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now?

A) $14,852
B) $13,125
C) $12,750
D) $13,044

Question 28

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?

A) 10
B) 11
C) 12
D) 13

Question 29

The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is

A) $8,500.
B) $7,830.
C) $8,638.
D) $8,860.

Question 30

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows:
Year 1 $120,000
Year 2 $200,000
Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?

A) $274,381
B) $165,290
C) $320,000
D) $160,000

Question 31

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

A) $2,519.
B) $2,830.
C) $2,600.
D) $2,820.

Question 32

Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments?

A) $114,199
B) $160,000
C) $46,975
D) $150,135

Question 33

A $10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations?

A) 5 interest periods, 6% interest
B) 20 interest periods, 6% interest
C) 20 interest periods, 1.5% interest
D) 5 interest periods, 1.5% interest

Question 34

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is

A) increased.
B) decreased.
C) not changed.
D) equal to the stated rate of interest.

Question 35

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?

A) 10
B) 12
C) 13
D) 15

Question 36

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

A) $1,818.
B) $1,623.
C) $1,802.
D) $2,754.

Question 37

Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment?

A) $180,000
B) $123,342
C) $165,772
D) $115,650

Question 38

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?

A) 8%
B) 8.5%
C) 9%
D) 10%

Question 39

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

A) The determination of the market price of a bond.
B) The determination of the declining-balance depreciation expense.
C) The determination of the amount to report for long-term notes payable.
D) The determination of the amount to report for lease liability.

Question 40

Which of the following discount rates will produce the smallest present value?

A) 8%
B) 9%
C) 10%
D) 4%

Question 41

Payments or receipts of equal dollar amounts are referred to as __________________.

Question 42

Match the items below by entering the appropriate code letter in the space provided.
A. Compound interest
B. Future value of a single amount
C. Future value of an annuity
D. Present value of a single amount
E. Present value of an annuity
_____ 1. The value today of a future amount to be received or paid.
_____ 2. The value at a future date of a given amount invested.
_____ 3. Return on principal plus interest for two or more periods.
_____ 4. Value today of a series of future amounts to be received or paid.
_____ 5. The sum of all the payments or receipts plus the accumulated compound interest on them.

Question 43

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

Question 44

The ______________ of a long-term note or bond is a function of three variables.