Question 1

What would you pay for an investment that pays you $24,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.

Accepted Answer

A) $147,468 
B) $162,216 
C) $155,882 
D) $171,470

Question 2

If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then

Accepted Answer

A) the present value of the annuity due is less than the present value of the ordinary annuity. 
B) the present value of the annuity due is greater than the present value of the ordinary annuity. 
C) the future value of the annuity due is equal to the future value of the ordinary annuity. 
D) the future value of the annuity due is less than the future value of the ordinary annuity.

Question 3

The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

Accepted Answer

A) True 
 B)False

Question 4

Stemway requires a new manufacturing facility.Management found three locations; all of which would provide needed capacity, the only difference is the price.Location A may be purchased for $500,000.Location B may be acquired with a down payment of $100,000 and annual payments at the end of each of the next twenty years of $50,000.Location C requires $40,000 payments at the beginning of each of the next twenty-five years.Assuming Stemway's borrowing costs are 8% per annum, which option is the least costly to the company?

Accepted Answer

A) Location A 
B) Location B 
C) Location C 
D) Location A and Location B

Question 5

What would you pay for an investment that pays you $500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

Accepted Answer

A) $15,590 
B) $155,900 
C) $48,610 
D) $51,835

Question 6

The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

Accepted Answer

A) True 
 B)False

Question 7

The future value of a deferred annuity is less than the future value of an annuity not deferred.

Accepted Answer

A) True 
 B)False

Question 8

Hiller Corporation makes an investment today (January 1, 2015).They will receive $30,000 every December 31st for the next six years (2015 - 2020).If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2015?

Accepted Answer

A) $123,342 
B) $138,144 
C) $243,456 
D) $272,670

Question 9

Moore Industries manufactures exercise equipment.Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's exercise equipment.After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,000,000 of 11% bonds on March 1, 2015, due on March 1, 2030, with interest payable each March 1 and September 1.At the time of issuance, the market interest rate for similar financial instruments is 10%.What is the selling price of the bonds?

Accepted Answer

A) $3,330,000 
B) $1,904,664 
C) $3,230,594 
D) $2,536,455

Question 10

On January 2, 2015, Wine Corporation wishes to issue $3,000,000 (par value) of its 8%, 10-year bonds.The bonds pay interest annually on January 1.The current yield rate on such bonds is 10%.Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

Accepted Answer

A) $3,000,000 
B) $2,631,204 
C) $3,000,018 
D) $3,318,078

Question 11

James leases a ski chalet to his best friend, Janet.The lease term is five years with $33,000 annual payments due at the beginning of each year.What is the present value of the payments discounted at 8% per annum?

Accepted Answer

A) $142,300 
B) $131,760 
C) $125,972 
D) $119,604

Question 12

Present value is the value now of a future sum or sums discounted assuming compound interest.

Accepted Answer

A) True 
 B)False

Question 13

Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

Accepted Answer

A) True 
 B)False

Question 14

John Jones won a lottery that will pay him $2,000,000 after twenty years.Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

Accepted Answer

A) $2,000,000 
B) $5,306,600 
C) $24,924,420 
D) $753,780

Question 15

On June 1, 2015, Pitts Company sold some equipment to Gannon Company.The two companies entered into an installment sales contract at a rate of 8%.The contract required 8 equal annual payments with the first payment due on June 1, 2015.What type of compound interest table is appropriate for this situation?

Accepted Answer

A) Present value of an annuity due of 1 table 
B) Present value of an ordinary annuity of 1 table 
C) Future amount of an ordinary annuity of 1 table 
D) Future amount of 1 table

Question 16

If $3,000 is put in a savings account today, what amount will be available three years from today?

Accepted Answer

A) $3,000 ÷ 1.260 
B) $3,000 × 1.260 
C) $3,000 × 1.080 × 3 
D) ($3,000 × 1.080) + ($3,000 × 1.166) + ($3,000 × 1.260)

Question 17

Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank.Which time value concept would be used to determine the maturity value of the certificate?

Accepted Answer

A) Present value of one. 
B) Future value of one. 
C) Present value of an annuity due. 
D) Future value of an ordinary annuity.

Question 18

Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years.How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

Accepted Answer

A) $20,000 times the future value of a 5-year, 10% ordinary annuity of 1 
B) $20,000 divided by the future value of a 5-year, 10% ordinary annuity of 1 
C) $20,000 times the present value of a 5-year, 10% ordinary annuity of 1 
D) $20,000 divided by the present value of a 5-year, 10% ordinary annuity of 1

Question 19

Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $42,000 for 15 years and to have a resale value of $80,000 at the end of that period.Assume a 10% rate and earnings at year end.The present value of 1 at 10% for 15 periods is .23939.The present value of an ordinary annuity at 10% for 15 periods is 7.60608.The future value of 1 at 10% for 15 periods is 4.17725.

Accepted Answer

A) $319,456 
B) $338,606 
C) $370,552 
D) $649,152

Question 20

The future value of a single sum is determined by multiplying the future value factor by its present value.

Accepted Answer

A) True 
 B)False

Exam 6: Accounting and the Time Value of Money

What would you pay for an investment that pays you $24,000 at the beginning of each year for the next ten years? Assume that the relevant interest rate for this type of investment is 10%.

If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then

The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

What would you pay for an investment that pays you $500,000 after forty years? Assume that the relevant interest rate for this type of investment is 6%.

The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future.

The future value of a deferred annuity is less than the future value of an annuity not deferred.

Hiller Corporation makes an investment today (January 1, 2015) .They will receive $30,000 every December 31st for the next six years (2015 - 2020) .If Hiller wants to earn 12% on the investment, what is the most they should invest on January 1, 2015?

James leases a ski chalet to his best friend, Janet.The lease term is five years with $33,000 annual payments due at the beginning of each year.What is the present value of the payments discounted at 8% per annum?

Present value is the value now of a future sum or sums discounted assuming compound interest.

Compound interest uses the accumulated balance at each year end to compute interest in the succeeding year.

John Jones won a lottery that will pay him $2,000,000 after twenty years.Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

If $3,000 is put in a savings account today, what amount will be available three years from today?

Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank.Which time value concept would be used to determine the maturity value of the certificate?

Al Darby wants to withdraw $20,000 (including principal) from an investment fund at the end of each year for five years.How should he compute his required initial investment at the beginning of the first year if the fund earns 10% compounded annually?

The future value of a single sum is determined by multiplying the future value factor by its present value.