Question 1

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?

Accepted Answer

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.

Question 2

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%?

Accepted Answer

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.

Question 3

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

Accepted Answer

A)  The amount to be received in the future is smaller than the amount to be paid off today 
B)  The value of interest declines over time 
C)  Funds can be invested in earning assets to yield a positive return 
D)  The time value of money depreciates over long periods of time C

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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.)

Accepted Answer

A)  $257,458 
B)  $1,783,167 
C)  $807,564 
D)  $1,086,877

Question 6

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?

Accepted Answer

The answer of Solar Co. borrowed $300,000,000 to buy equipment...

Question 7

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%?

Accepted Answer

A)  $151,736 
B)  $143,147 
C)  $259,215 
D)  $200,000

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

The answer of Compute the future value for each of...

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

The answer of Why is one dollar now worth more...

Question 12

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?

Accepted Answer

The answer of Solar Co. borrowed $5,000,000 to buy equipment...

Question 13

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?

Accepted Answer

A)  $2,472,000 
B)  $2,544,000 
C)  $2,546,160 
D)  $2,547,273

Question 14

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?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $20,000,000...

Question 15

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?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $16,000,000...

Question 16

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?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $20,000,000...

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?

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?