Question 1

In present value calculations, the process of determining the present value is called
A) allocating.
B) pricing.
C) negotiating.
D) discounting.

Accepted Answer

The process of determining the present value is called discounting. This involves calculating the current value of future cash flows at a specific rate of return. Therefore, choice D, discounting, is the correct answer. The other options, allocating, pricing, and negotiating, do not accurately describe the process of determining present value.

Question 2

If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is
A) $1,818.
B) $1,623.
C) $1,802.
D) $2,754.

Accepted Answer

We will use the formula for present value of a single amount:

Present value = Future value / (1 + r)^n

where r is the discount rate and n is the number of periods.

Plugging in the given values, we get:

Present value = 2,000 / (1 + 0.11)^2
Present value = 2,000 / 1.2541
Present value = $1,623.26 (rounded to the nearest cent)

Therefore, the best choice is B, with a present value of $1,623.

Question 3

If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is
A) $2,519.
B) $2,830.
C) $2,600.
D) $2,820.

Accepted Answer

The formula for present value is:
PV = FV / (1 + r)^n

Where:
PV = present value
FV = future value
r = discount rate
n = number of periods

Using the given values:
FV = $3,000
r = 6%
n = 3

PV = $3,000 / (1 + 0.06)^3
PV = $3,000 / 1.191016
PV = $2,519.04

Therefore, the present value is $2,519, and the best choice is A.

Question 4

Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 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) $2,518,860.
B) $2,591,520.
C) $2,670,000.
D) $3,000,000.

Accepted Answer

To find the present value of the $3,000,000 prize, we need to use the formula for present value of a future payment: PV = FV / (1 + r)^(n), where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years.

Using this formula, we get:
PV = 3,000,000 / (1 + 0.06)^3
PV = 3,000,000 / 1.191016
PV = $2,518,859.84 (rounded to the nearest cent)

Therefore, the best choice is to take the present value of the prize now, which is $2,518,860, since it is less than the $3,000,000 you would receive in three years. By taking the present value now, you are accounting for the time value of money, or the fact that money is worth more now than it is in the future due to inflation and the opportunity cost of investing it elsewhere.

Question 5

If you are able to earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now?
A) $14,852
B) $13,125
C) $12,750
D) $13,044

Accepted Answer

To determine the amount needed to be invested, we use the formula:
Final amount = Initial amount + (Initial amount x rate of return)
$15,000 = Initial amount + (Initial amount x 0.15)
$15,000 = Initial amount + 0.15Initial amount
$15,000 = 1.15Initial amount
Initial amount = $13,043.48
Rounding up, the answer is $13,044, which is choice D.

Question 6

A $10,000, 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

Accepted Answer

We need to find the present value of a $10000 6% 5-year note payable that pays interest quarterly. Therefore, we need to use tables that show the periodic interest for quarterly payments. That is, we need the interest rate per quarter. The formula to calculate this interest rate is:

(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%

Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.

Question 7

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year $1 \quad \$ 120,000$
Year $2 \quad \$ 200,000$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $274,381
B) $165,290
C) $320,000
D) $160,000

Accepted Answer

The maximum price Dexter should pay is the present value of the cash flows discounted at the required rate of return (10%). The present value of Year 1 cash flow is $ \$120,000 / (1+0.10)^1 = \$109,091 $ and Year 2 is $ \$200,000 / (1+0.10)^2 = \$165,290 $. Adding these gives $ \$274,381 $.

Question 8

Peter Johnson invests $35,516.80 now for a series of $5,000 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

Accepted Answer

Using the formula for the present value of an annuity due:

PV = C * [(1 - (1 + r/n)^(-nt))/ (r/n)] * (1 + r/n)

where PV is the present value, C is the periodic payment, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years.

We have PV = $35,516.80, C = $5,000, r = 10%, and n = 1 (annual payments). Solving for t, we get:

$35,516.80 = $5,000 * [(1 - (1 + 0.10/1)^(-t*1))/ (0.10/1)] * (1 + 0.10/1)

$35,516.80 = $5,000 * [(1 - 1/(1.1)^t)/ 0.10] * 1.1

$35,516.80 = $55,000 * (1 - 1/(1.1)^t)

(1 - 1/(1.1)^t) = $35,516.80 / $55,000

(1.1)^t - 1 = 0.6458

Using logarithms, we get:

t = log(1 + 0.6458)/log(1.1) = 13.03

Therefore, Peter will receive 13 annual payments. The closest answer choice is C (13).

Question 9

Suzy Douglas has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000?
A) 10
B) 11
C) 12
D) 13

Accepted Answer

To find the number of years Suzy must wait to receive $200,000, we can use the formula for the future value of a single sum, which is $FV = PV(1 + r)^n$, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Rearranging the formula to solve for n gives us $n = \frac{\log(FV/PV)}{\log(1 + r)}$.Plugging in the values from the question:- $FV = $200,000$- $PV = $73,540$- $r = 8\% = 0.08$We get $n = \frac{\log(200000/73540)}{\log(1.08)}$.Calculating this gives us approximately 13 years.

Question 10

Hazel Company has just purchased equipment that requires annual payments of $40,000 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) $114,199
B) $160,000
C) $46,975
D) $150,135

Accepted Answer

The present value of an annuity can be calculated using the formula PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment, r is the discount rate, and n is the number of periods. Plugging in the given values (PMT = $40,000, r = 0.15, n = 4), the calculation gives a present value of approximately $114,199.

Question 11

Which of the following discount rates will produce the smallest present value?
A) 8%
B) 9%
C) 10%
D) 4%

Accepted Answer

A higher discount rate reduces the present value of future cash flows more than a lower discount rate. Therefore, among the given options, 10% will produce the smallest present value.

Question 12

Wingate Company borrowed $90,000 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?

Accepted Answer

The answer of Wingate Company borrowed $90,000 on January 2,...

Question 13

The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is
A) $1,200.
B) $4,484.
C) $4,477.
D) $4,200.

Accepted Answer

To find the present value (the amount you must deposit now) to accumulate a future sum, you use the formula for the present value of a single sum: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($6000), r is the interest rate per period (6% or 0.06), and n is the number of periods (5 years). Plugging in the values: PV = $6000 / (1 + 0.06)^5 ≈ $4484.

Question 14

If you are able to earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now?
A) $27,747
B) $27,778
C) $27,273
D) $29,700

Accepted Answer

The answer of If you are able to earn an...

Question 15

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.

Accepted Answer

All three factors (dollar amount, time, and interest rate) are used to calculate present value. The present value formula takes into account the amount to be received, the time value of money, and the opportunity cost of investing that money elsewhere.

Question 16

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.

Accepted Answer

The determination of declining-balance depreciation expense does not involve present value calculations. It is a method of calculating depreciation expense based on a fixed rate applied to a declining book value of an asset.

A involves present value calculations to determine the market price of a bond.
C involves present value calculations to determine the amount to report for long-term notes payable.
D involves present value calculations to determine the amount to report for lease liability.

Question 17

The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is
A) $8,500.
B) $7,830.
C) $8,638.
D) $8,860.

Accepted Answer

The formula for present value, PV, given future value, FV, and interest rate, r, and time, t, is:

PV = FV / (1 + r)^t

Plugging in the given values:

FV = $10,000
r = 5%
t = 3 years

PV = $10,000 / (1 + 0.05)^3
PV = $8,637.95

Therefore, the amount you must deposit now is $8,638, which corresponds to choice C.

Question 18

The present value of $10,000 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.

Accepted Answer

The present value of a future cash flow decreases as the discount rate increases. Therefore, if the discount rate is increased, the present value of $10,000 to be received in 5 years will be smaller.

Question 19

If Sloane Joyner invests $10,514.81 now and she will receive $30,000 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%

Accepted Answer

The answer of If Sloane Joyner invests $10,514.81 now and...

Question 20

Perdue Company has purchased equipment that requires annual payments of $30,000 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) $180,000
B) $123,342
C) $165,772
D) $115,650

Accepted Answer

To find the present value of these cash flows, we need to use the formula for present value of an annuity:
PV = PMT x [(1 - (1/ (1 + r)^n)) / r]
where PV is the present value, PMT is the annuity payment per period, r is the discount rate, and n is the number of periods.

In this case, PMT = $30,000, r = 12%, and n = 6. Plugging these values into the formula, we get:
PV = $30,000 x [(1 - (1/ (1 + 0.12)^6)) / 0.12] = $123,342

Therefore, the amount used to record the equipment is $123,342. Answer choice B is correct.

Quiz 14: Specimen Financial Statements: Apple Inc

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

If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is

If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is

If you are able to earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now?

A $10,000, 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?

Peter Johnson invests $35,516.80 now for a series of $5,000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive?

Suzy Douglas has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000?

Hazel Company has just purchased equipment that requires annual payments of $40,000 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?

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

Wingate Company borrowed $90,000 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?

The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is

If you are able to earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now?

Present value is based on

Which of the following accounting problems does not involve a present value calculation?

The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is

If Sloane Joyner invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment?

Perdue Company has purchased equipment that requires annual payments of $30,000 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?