Deck 15: Appendix: Accounting and the Time Value of Money

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

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

Question 5

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?

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

Question 6

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.)

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

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%?

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

Question 8

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?

Question 9

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?

Question 10

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?

Question 11

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%?

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?

Question 13

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?

Question 14

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

Question 15

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?

Question 16

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