Deck 26: Time Value of Money

Question 1

The present value of $2,000 to be received nine years from today at 8% interest compounded annually is $1,000.
Calculation: $2,000 x 0.5002 = $1,000.

Answer 1

True

Question 2

Interest is the payment to the owner of an asset for its use by a borrower.

Answer 2

True

Question 3

An ordinary annuity refers to a series of equal payments made or received at the end of each period.

Answer 3

True

Question 4

The present value of 1 formula is often useful when a borrowed asset must be repaid in full at a later date and the borrower wants to know its worth at the future date.

Question 5

The present value factor for determining the present value of $6,300 to be received three years from today at 10% interest compounded semiannually is 0.7462.

Question 6

The present value of an annuity table can be used to determine the series of equal payments that are required by a loan agreement.

Question 7

Future value can be found if the interest rate (i), the number of periods (n), and the present value (p) are known.

Question 8

The number of periods in a present value calculation can only be expressed in years.

Question 9

In a present value or future value table, the length of one time period may be interpreted as one year, one month, or any other length of time.

Question 10

The future value of $100 compounded semiannually for 3 years at 12% equals $140.49.
Calculation: $100 x1.4185 = $141.85.

Question 11

An interest rate is also called a discount rate.

Question 12

Sandra has a savings account that has accumulated to $50,000. She started with $28,225, and earned interest at 10% compounded annually. It took her five years to accumulate the $50,000.
Calculation: $28,225/$50,000 = 0.5645. This is the present value of 1 factor, 10%, 6 periods.

Question 13

The future value of an ordinary annuity is the accumulated value of each annuity payment with interest one period after the date of the final payment.

Question 14

A company can use present and future value computations to estimate the interest component of holding assets over time.

Question 15

The present value of $5,000 per year for three years at 12% compounded annually is $12,009.
Calculation: $5,000 x 2.4018 = $12,009.

Question 16

From the perspective of a depositor, a savings account is a liability with interest.

Question 17

The number of periods in a future value calculation can only be expressed in years.

Question 18

With deposits of $5,000 at the end of each year, you will have accumulated $38,578 at the end of the sixth year if the annual rate of interest is 10%
Calculation: $5,000 x 7.7156 = $38,578.

Question 19

An annuity is a series of equal payments.

Question 20

At an annual interest rate of 8% compounded annually, $5,300 will accumulate to a total of $7,210.65 in 5 years.
Calculation: $7,210.65/$5,300 = 1.3605. This is the future value of 1 factor for 4 periods, 8%.

Question 21

Sam has a loan that requires a single payment of $4,000 at the end of 3 years. The loan's interest rate is 6%, compounded semiannually. How much did Sam borrow?

A) $3,358.40
B) $4,000.00
C) $3,660.40
D) $4,776.40
E) $3,350.00

Question 22

Jon Shear expects an investment of $25,000 to return $6,595 annually. His investment is earning 10% per year. How many annual payments will he receive?

A) Five payments.
B) Six payments.
C) Four payments.
D) Three payments.
E) More than six payments.

Question 23

Interest is:

A) Time.
B) A borrower's payment to the owner of an asset for its use.
C) The same as a savings account.
D) Always a liability.
E) Always an asset.

Question 24

Keisha has $3,500 now and plans on investing it in a fund that will pay her 12% interest compounded quarterly. How much will Keisha have accumulated after 2 years?

A) $4,433.80
B) $4,340.00
C) $4,390.40
D) $3,920.00
E) $3,500.00

Question 25

Crowe Company has acquired a building with a loan that requires payments of $20,000 every six months for 5 years. The annual interest rate on the loan is 12%. What is the present value of the building?

A) $72,096
B) $113,004
C) $147,202
D) $86,590
E) $200,000

Question 26

Chad is setting up a retirement fund, and he plans on depositing $5,000 per year in an investment that will pay 7% annual interest. How long will it take him to reach his retirement goal of $69,080?

A) 13.816 years
B) 0.072 years
C) 10 years
D) 20 years
E) 5 years

Question 27

Explain the concept of the future value of an annuity.

Question 28

What interest rate is required to accumulate $6,802.50 in four years from an investment of $5,000?

A) 5%.
B) 8%.
C) 10%.
D) 12%.
E) 15%.

Question 29

What is interest?

Question 30

Explain the concept of the present value of a single amount.

Question 31

How long will it take an investment of $25,000 at 6% compounded annually to accumulate to a total of $35,462.50?

A) 4 years.
B) 5 years.
C) 6 years.
D) 2 years.
E) 10 years.

Question 32

A company needs to have $200,000 in 4 years, and will create a fund to insure that the $200,000 will be available. If they can earn a 7% return, how much must the company invest in the fund today to equal the $200,000 at the end of 4 years?

Question 33

A company is considering an investment that will return $20,000 semiannually at the end of each semiannual period for 4 years. If the company requires an annual return of 10%, what is the maximum amount it is willing to pay for this investment?

A) Not more than $63,398.
B) Not more than $126,796.
C) Not more than $80,000.
D) Not more than $129,264.
E) Not more than $160,000.

Question 34

A company is considering investing in a project that is expected to return $350,000 four years from now. How much is the company willing to pay for this investment if the company requires a 12% return?

A) $55,606.
B) $137,681.
C) $222,425.
D) $265,764.
E) $350,000.

Question 35

Which interest rate column would you use from a present value table or a future value table for 8% compounded quarterly?

A) 12%.
B) 6%.
C) 3%.
D) 2%.
E) 1%.

Question 36

Explain the concept of the present value of an annuity.

Question 37

A company expects to invest $5,000 today at 12% annual interest and plans to receive $15,529 at the end of the investment period. How many years will elapse before the company accumulates the $15,529?

A) 0.322 years.
B) 3.1058 years.
C) 5 years.
D) 8 years.
E) 10 years.

Question 38

Explain the concept of the future value of a single amount.

Question 39

What amount can you borrow if you make six quarterly payments of $4,000 at a 12% annual rate of interest?

A) $24,838.00.
B) $21,668.80.
C) $31,049.00.
D) $40,000.00.
E) $44,800,00.

Question 40

An individual is planning to set-up an education fund for her children. She plans to invest $10,000 annually at the end of each year. She expects to withdraw money from the fund at the end of 10 years and expects to earn an annual return of 8%. What will be the total value of the fund at the end of 10 years?

A) $46,320.
B) $67,107.
C) $100,000.
D) $144,870.
E) $215,890.

Question 41

You are little late planning your retirement, but are looking forward to retiring in 10 years. You expect to save $6,000 a year at an annual rate of 8%. How much will you have accumulated when you retire?

Question 42

A company is creating a fund today by depositing $65,763. The fund will grow to $90,000 after 8 years. What annual interest rate is the company earning on the fund?

Question 43

Thompson Company has acquired a machine from a dealer that requires a payment of $45,000 at the end of five years. This transaction includes interest at 8%, compounded semiannually. What is the value of the machine today?

Question 44

A company is setting aside $21,354 today, and wishes to have $30,000 at the end of three years for a down payment on a piece of property. What interest rate must the company earn?

Question 45

A company borrows money from the bank by promising to make 6 annual year-end payments of $25,000 each. How much is the company able to borrow if the interest rate is 9%?

Question 46

_____________ is a borrower's payment to the owner of an asset for its use.

Question 47

The future value of an ________________ annuity is the accumulated value of each annuity payment with interest as of the date of the final payment.

Question 48

Madera Iron Sculpting is planning on replacing one of its robotic welders in five years by making a one-time deposit of $20,000 today and four yearly contributions of $5,000 beginning at the end of year 1. The deposits will earn 10% interest. How much money will Sierra have accumulated at the end of five years to replace the welder?

Question 49

A company has $50,000 today to invest in a fund that will earn 7%. How much will the fund contain at the end of 8 years?

Question 50

When you reach retirement age, you will have one fund of $100,000 from which you are going to make annual withdrawals of $14,702. The fund will earn 6% per year. For how many years will you be able to draw an even amount of $14,702?

Question 51

The interest rate is also called the __________________ rate.

Question 52

A company is setting up a sinking fund to pay off $8,654,000 in bonds that are due in 7 years. The fund will earn 7% interest, and the company intends to put away a series of equal year-end amounts for 7 years. What is the amount of the annual deposits that the company must make?

Question 53

A company is beginning a savings plan. It will be saving $15,000 per year for the next 10 years. How much will the company have accumulated after the tenth year-end deposit, assuming the fund earns 10% interest?

Question 54

Annette has a loan that requires a $25,000 payment at the end of three years. The interest rate on the loan is 5%, compounded annually. How much did Annette borrow today?

Question 55

Big League Sports borrowed $883,212, and must make annual year-end payments of $120,000 each. If Big League's interest rate is 6%, how many years will it take Big League Sports to pay off the loan?

Question 56

Troy has $105,000 now. He has a loan of $175,000 that he must pay at the end of 5 years. He can invest his $105,000 at 10% interest compounded semiannually. Will Troy have enough to pay his loan at the end of the 5 years?

Question 57

To calculate present value of an amount, two factors are required: __________________ and __________________.

Question 58

Daley Co. lends $524,210 to Davis Corporation. The terms of the loan require that Davis make six semiannual period-end payments of $100,000 each. What semiannual interest rate is Davis paying on the loan?

Question 59

A company borrows money from the bank by promising to make 8 semiannual payments of $9,000 each. How much is the company able to borrow if the interest rate is 10% compounded semiannually?

Question 60

An _____________ is a series of equal payments occurring at equal intervals.