Deck 27: Time Value of Money

Question 1

A higher discount rate produces a higher present value.

Answer 1

False

Question 2

If $30000 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) $48867
B) $315000
C) $377337
D) $450000

Answer 2

C

Question 3

McGoff Company deposits $20000 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) $20000 by the future value of 1 factor.
B) $100000 by 1.04.
C) $100000 by 1.20.
D) $20000 by the future value of an annuity factor.

Answer 3

D

Question 4

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

Question 5

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 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

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

Question 8

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 9

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

Question 10

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 11

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 12

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 13

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

Question 14

The decision to make long-term capital investments is best evaluated using discounting techniques that recognize the time value of money.

Question 15

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 16

If $40000 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) $32878
B) $48000
C) $48620
D) $48666

Question 17

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

Question 18

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

Question 19

Many companies calculate the future value of the cash flows involved in an investment in evaluating long-term capital investments.

Question 20

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 21

If the single amount of $2000 is to be received in 2 years and discounted at 11% its present value is

A) $1818.
B) $1623.
C) $1802.
D) $2754.

Question 22

If the single amount of $3000 is to be received in 3 years and discounted at 6% its present value is

A) $2519.
B) $2830.
C) $2600.
D) $2820.

Question 23

If you are able to earn a 15% rate of return what amount would you need to invest to have $15000 one year from now?

A) $14852
B) $13125
C) $12750
D) $13044

Question 24

The present value of $10000 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 25

Suzy Douglas has been offered the opportunity of investing $73540 now. The investment will earn 8% per year and at the end of its life will return $200000 to Suzy. How many years must Suzy wait to receive the $200000?

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

Question 26

The amount you must deposit now in your savings account paying 5% interest in order to accumulate $10000 for your first tuition payment when you start college in 3 years is

A) $8500.
B) $7830.
C) $8638.
D) $8860.

Question 27

Hazel Company has just purchased equipment that requires annual payments of $40000 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) $114199
B) $160000
C) $46975
D) $150135

Question 28

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 29

Perdue Company has purchased equipment that requires annual payments of $30000 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) $180000
B) $123342
C) $165772
D) $115650

Question 30

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

A) $274381
B) $165290
C) $320000
D) $160000

Question 31

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 32

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

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

Question 33

Peter Johnson invests $35516.80 now for a series of $5000 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 34

A $10000 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 35

If you are able to earn an 8% rate of return what amount would you need to invest to have $30000 one year from now?

A) $27747
B) $27778
C) $27273
D) $29700

Question 36

Suppose you have a winning lottery ticket and you are given the option of accepting $3000000 three years from now or taking the present value of the $3000000 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) $2518860.
B) $2591520.
C) $2670000.
D) $3000000.

Question 37

If Sloane Joyner invests $10514.81 now and she will receive $30000 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 38

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

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

Question 39

The amount you must deposit now in your savings account paying 6% interest in order to accumulate $6000 for a down payment 5 years from now on a new car is

A) $1200.
B) $4484.
C) $4477.
D) $4200.

Question 40

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 41

Robin Clark has a cell phone that she uses only for emergencies. The cost of the phone is $40 a month. The cellular company is offering unlimited nights and weekends for an additional $10 a month ($120 a year). Robin thinks it would be "cool" to have this benefit and after all $10 a month is not so much. Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the unlimited nights and weekends offer.

Question 42

Flower Company is considering an investment which will return a lump sum of $2500000 six years from now. What amount should Flower Company pay for this investment to earn an 11% return?

Question 43

Luis Rodriguez wants to buy a car in 3 years. He will need $3000 for a down payment. The annual interest rate is 9%. How much money must Luis invest today for the purchase?

Question 44

Rob Honda plans to buy a home and can deposit $15000 for the purchase today. If the annual interest rate is 8% how much can Rob expect to have for a down payment in 5 years?

Question 45

DMV leases a building for 20 years. The lease requires 20 annual payments of $12000 each with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building?

Question 46

Amy Brown plans to buy a surround sound stereo system for $1100 after 3 years. If the interest rate is 6% how much money should Amy set aside today for the purchase?

Question 47

Mandy How plans to buy an automobile and can deposit $3000 toward the purchase today. If the annual interest rate is 8% how much can Mandy expect to have as a down payment in 3 years?

Question 48

Wingate Company borrowed $90000 on January 2 2017. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Wingate repay at the end of the third year?

Question 49

Compute the future value of $6000 invested every year at an interest rate of 9%. You invest the money for 20 years with the first payment made at the end of the year.

Question 50

Jose Reynolds deposited $10000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years?

Question 51

Chang Company earns 12% on an investment that will return $400000 eleven years from now. What is the amount Chang Company should invest now to earn this rate of return?

Question 52

Kim Black plans to buy a truck for $24000 after 3 years. If the interest rate is 6% how much money should Kim set aside today for the purchase?

Question 53

Lamb Company deposited $15000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year?

Question 54

Pleasant Company has decided to begin accumulating a fund for plant expansion. The company deposited $80000 in a fund on January 2 2013. Pleasant will also deposit $40000 annually at the end of each year starting in 2013. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2017 (after the 2017 deposit)?

Question 55

Martin Company issued $900000 10-year bonds and agreed to make annual sinking fund deposits of $72000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years?

Question 56

What is the present value of $90000 due 7 years from now discounted at 9%?
(b) What is the present value of $150000 due 5 years from now discounted at 12%?

Question 57

If Kelly Cranford invests $11970 now she will receive $40000 at the end of 14 years. What annual rate of return will Kelly earn on her investment?

Question 58

Bill Cigarettes acquired a bad habit of smoking in high school. Bill spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues but he is keenly aware of financial issues. Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking.

Question 59

Bill and Ellen Sweatt plan to invest $2500 a year in an educational IRA for their granddaughter Sloane Martin. They will make these deposits on January 2^nd of each year. Bill and Ellen feel they can safely earn 8%. How much will be in this account on December 31 of the 18^th year?

Question 60

Frye Company is considering investing in an annuity contract that will return $50000 annually at the end of each year for 20 years. What amount should Frye Company pay for this investment if it earns an 8% return?

Question 61

Sarah Denny purchased an investment for $40260.48. From this investment she will receive $6000 annually for the next 10 years starting one year from now. What rate of interest will Sarah be earning on her investment?

Question 62

Cecilia Jeffries purchased an investment for $49090.75. From this investment she will receive $5000 annually for the next 20 years starting one year from now. What rate of interest will Cecilia be earning on her investment?

Question 63

Lucky Lou has just won the lottery and will receive an annual payment of $100000 every year for the next 20 years. If the annual interest rate is 8% what is the present value of the winnings?

Question 64

You are purchasing a car for $25000 and you obtain financing as follows: $2500 down payment 12% interest semiannual payments over 5 years.
Instructions
Compute the payment you will make every 6 months.

Question 65

If the present value of the cash ______________ exceeds the present value of the cash ________________ the investment should be rejected.

Question 66

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

Question 67

CVS leases a building for 20 years. The lease requires 20 annual payments of $10000 each with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building?

Question 68

Match the items below by entering the appropriate code letter in the space provided. 11eb1392_1c37_96ec_8021_99bf91b8df8f

Question 69

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

Question 70

Frostmore Company is considering investing in an annuity contract that will return $50000 annually at the end of each year for 20 years. What amount should Frostmore pay for this investment if it earns an 8% return?