Deck 6: Time Value of Money Concepts

Question 1

A deferred annuity is one in which interest charges are deferred for a stated time period.

Answer 1

False

Question 2

Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?

A)$88,849.
B)$78,941.
C)$25,336.
D)$22,510.

Answer 2

B

Question 3

With an annuity due, a payment is made or received on the date the agreement begins.

Answer 3

True

Question 4

Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?

A)$109,270.
B)$119,410.
C)$142,576.
D)$309,090.

Question 5

Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Question 6

The calculation of present value eliminates interest from future cash flows.

Question 7

In the future value of an ordinary annuity, the last cash payment will not earn any interest.

Question 8

Monetary assets include only cash and cash equivalents.

Question 9

Most, but not all, liabilities are monetary liabilities.

Question 10

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

Question 11

An annuity consists of level principal payments plus interest on the unpaid balance.

Question 12

When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

Question 13

Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?

A)$35,069.
B)$43,131.
C)$37,205.
D)$35,000.

Question 14

The calculation of future value requires the removal of interest.

Question 15

Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?

A)$8,375.
B)$41,874.
C)$11,941.
D)$41,000.

Question 16

Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today?

A)$66,110.
B)$81,309.
C)$406,545.
D)$330,560.

Question 17

With an ordinary annuity, a payment is made or received on the date the agreement begins.

Question 18

Compound interest includes interest earned on interest.

Question 19

An annuity is a series of equal periodic payments.

Question 20

Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.

Question 21

Column 5 is an interest table for the:

A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Present value of an annuity due of 1.

Question 22

Sondra deposits $2,000 in an IRA account on April 15, 2013. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2023?

A)$20,600.
B)$20,928.
C)$23,616.
D)$24,715.

Question 23

On January 1, 2013, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2016. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?

A)$28,286.
B)$25,886.
C)$26,662.
D)$27,300.

Question 24

Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive a lump-sum payment now based on a 3% annual interest rate. What would be the lump-sum payment?

A)$23,586.
B)$22,899.
C)$21,565.
D)$23,000.

Question 25

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

A)$41,556.
B)$39,982.
C)$32,400.
D)$38,100.

Question 26

Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years. She should use a table for the:

A)Future value of an ordinary annuity of 1.
B)Future value of 1.
C)Future value of an annuity of 1.
D)Present value of an annuity due of 1.

Question 27

Shelley wants to cash in her winning lottery ticket. She can either receive ten $100,000 semiannual payments starting today, or she can receive a lump-sum payment now based on a 6% annual interest rate. What is the equivalent lump-sum payment?

A)$853,020.
B)$801,969.
C)$744,090.
D)$878,611.

Question 28

Column 2 is an interest table for the:

A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Question 29

Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?

A)11 years.
B)10 years.
C)8.5 years.
D)8.8 years.

Question 30

Micro Brewery borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

A)$55,379.
B)$106,059.
C)$30,138.
D)$60,276.

Question 31

A firm leases equipment under a capital lease (analogous to an installment purchase) that calls for 12 semiannual payments of $39,014.40. The first payment is due at the inception of the lease. The annual rate on the lease is 6%. What is the value of the leased asset at inception of the lease?

A)$388,349.
B)$400,000.
C)$454,128.
D)$440,082.

Question 32

Ajax Company purchased a five-year certificate of deposit for its building fund in the amount of $220,000. How much should the certificate of deposit be worth at the end of five years if interest is compounded at an annual rate of 9%?

A)$855,723.
B)$142,985.
C)$319,000.
D)$338,496.

Question 33

On January 1, 2013, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2015. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?

A)$26,662.
B)$27,462.
C)$28,286.
D)$29,135.

Question 34

Column 3 is an interest table for the:

A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Present value of an annuity due of 1.

Question 35

Column 1 is an interest table for the:

A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Question 36

Rosie's Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

A)$25,750.
B)$29,761.
C)$30,139.
D)$25,500.

Question 37

Column 4 is an interest table for the:

A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Question 38

Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?

A)15 years.
B)16 years.
C)14 years.
D)12.3 years.

Question 39

Column 6 is an interest table for the:

A)Present value of an ordinary annuity of 1.
B)Future value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Question 40

At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

A)$7,096.
B)$7,213.
C)$7,129.
D)$8,880.

Question 41

Yamaha Inc. hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for:

A)The future value of a deferred annuity.
B)The future value of an ordinary annuity.
C)The future value of an annuity due.
D)None of the above is correct.

Question 42

Which of the following must be known to compute the interest rate paid from financing an asset purchase with an annuity?

A)Fair value of the asset purchased, number and dollar amount of the annuity payments.
B)Present value of the annuity, dollar amount and timing of the annuity payments.
C)Fair value of the asset and timing of the annuity payments.
D)Number of annuity payments and future value of the annuity.

Question 43

Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:

A)$73,918.
B)$123,918.
C)$130,000.
D)$169,560.

Question 44

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:

A)Is the present value of a deferred annuity.
B)Is the present value of an annuity due.
C)Is $20 million.
D)Is zero because no cash is owed for five years.

Question 45

Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are over in three years. The cash flow possibilities and probabilities for the restoration costs in three years are as follows: The company's credit-adjusted risk-free interest rate is 5%. The liability that Simpson must record at the beginning of the project for the restoration costs is:

A)$129,576.
B)$145,000.
C)$125,257.
D)$172,768.

Question 46

Mary Alice just won the lottery and is trying to decide between the annual cash flow payment option of $250,000 per year for 25 years beginning today and the lump-sum option. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives?

A)$6,250,000.
B)$3,195,840.
C)$3,637,590.
D)$3,387,590.

Question 47

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond?

A)$828.
B)$1,686.
C)$1,000.
D)$893.

Question 48

How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

A)$1,671.
B)$2,570.
C)$2,358.
D)$2,006.

Question 49

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

A)A deferred annuity.
B)An ordinary annuity.
C)An annuity due.
D)A delayed annuity.

Question 50

On October 1, 2013, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2014. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

A)$2,500,000.
B)$2,225,000.
C)$1,847,950.
D)$2,115,270.

Question 51

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

A)$9,176.
B)$6,499.
C)$5,500.
D)$5,960.

Question 52

Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?

A)$32,617.
B)$29,924.
C)$27,250.
D)$26,800.

Question 53

An investment product promises to pay $42,000 at the end of 10 years. If an investor feels this investment should produce a rate of return of 12%, compounded annually, what's the most the investor should be willing to pay for the investment?

A)$15,146.
B)$13,523.
C)$42,000.
D)$130,446.

Question 54

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

A)Obtain the FVA factor for n + 1 and deduct 1.
B)Obtain the FVA factor for n and deduct 1.
C)Obtain the FVA factor for n - 1 and add 1.
D)Obtain the FVA factor for n + 1 and add 1.

Question 55

Mustard's Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

A)$10,699.
B)$11,468.
C)$12,100.
D)$14,000.

Question 56

Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?

A)$200,000.
B)$178,000.
C)$118,690.
D)$222,000.

Question 57

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:

A)$13,200.
B)$10,238.
C)$33,200.
D)$15,543.

Question 58

LeAnn wishes to know how much she should set invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an annuity due of 1.

Question 59

A series of equal periodic payments that starts more than one period after the agreement is called:

A)An annuity due.
B)An ordinary annuity.
C)A future annuity.
D)A deferred annuity.

Question 60

Davenport Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what lump sum at employment date would make her indifferent between the two options?

A)$60,000.
B)$62,867.
C)$72,867.
D)$80,000.

Question 61

Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year.
Required:
Calculate the total present value of the cash flows.

Question 62

Suppose that Healdsburg wants to buy back the 7.75% notes on December 31, 2013, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only)?

Question 63

Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2013, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over the principal payment only on Healdsburg 's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

Question 64

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

A)Present value of 1.
B)Present value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Question 65

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

A)Multiply $10,500 by the present value of 1.
B)Divide $10,500 by the future value of an ordinary annuity of 1.
C)Divide $10,500 by the present value of an annuity due of 1.
D)Multiply $10,500 by the present value of an ordinary annuity of 1.

Question 66

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

A)$166,651.
B)$135,252.
C)$203,351.
D)$191,852.

Question 67

On January 1, 2013, Glanville Company sold goods to Otter Corporation. Otter signed a noninterest-bearing note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2013. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2013 of:

A)$90,000.
B)$69,343.
C)$74,891.
D)None of the above.

Question 68

Garland Inc. offers a new employee a lump-sum signing bonus at the date of employment, June 1, 2013. Alternatively, the employee can take $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2017. Assuming the employee's time value of money is 9% annually, what lump sum at employment date would make him indifferent between the two options?

A)$44,035.
B)$40,855.
C)$69,035.
D)$65,855.

Question 69

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?

A)$15,783,077.
B)$17,045,650.
C)$23,190,400.
D)Cannot be determined from the given information.

Question 70

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

A)Present value of an annuity of 1.
B)Future value of an annuity due of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an ordinary annuity of 1.

Question 71

Compute the future value of the following invested amounts at the specified periods and interest rates.

Question 72

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

A)$1,667.
B)$1,511.
C)$1,834.
D)None of the above.

Question 73

Kunkle Company wishes to earn 20% annually on its investments. If it makes an investment that equals or exceeds that rate, it considers it a success. Assume that it invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X for which it will consider the investment a success? Assume that it can't invest for fractional parts of a year.

A)4 years.
B)6 years.
C)7 years.
D)9 years.

Question 74

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year.
Required:
Calculate the total present value of the cash savings.

Question 75

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Question 76

Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?

A)$23,026.
B)$57,737.
C)$62,711.
D)None of the above is correct.

Question 77

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

A)Future value of an ordinary annuity of 1.
B)Future value of an annuity due of 1.
C)Future value of 1.
D)Present value of an annuity due of 1.

Question 78

Suppose that Healdsburg renegotiates the 8% notes on December 31, 2018, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2019, rather than pay the annual interest payments and the $225 million in a lump sum at maturity. What would the annual payments be?

Question 79

The total cash interest payments in 2013 for these notes.

Question 80

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?

A)Between 13% and 14%.
B)Between 7% and 8%.
C)Between 5.5% and 6%.
D)Cannot be determined from the given information.