Question 1

Present and future value tables of $1 at 11% are presented below.

-Polo Publishers purchased a multi-color offset press with terms of $50,000 to be paid at the date of purchase, 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.

Accepted Answer

$50,000 + ($20,000 × 3.69590) = $123,918
*PVA of $1: n = 5; i = 11%

Question 2

Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are completed 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: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $129,576.
B) $145,000.
C) $125,257.
D) $172,768.

Accepted Answer

Expected cash flow: 11ea937b_3640_5ec3_a419_637e6c449ace_TB2599_00 *PV of $1: n = 3; i = 5%

Question 3

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? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $828.
B) $1,686.
C) $1,000.
D) $893.

Accepted Answer

11ea937b_3640_37b1_a419_5f01e9ea490f_TB2599_00 *PVA of $1: n = 40; i = 5%
**PV of $1: n = 40; i = 5%

Question 4

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 these answer choices are correct.

Accepted Answer

The answer of Yamaha Inc. hires a new chief financial...

Question 5

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.

Accepted Answer

The liability for this signing bonus is a deferred annuity because it is not payable immediately, but rather will be paid out over a period of 10 years starting five years from the CEO's start date. Therefore, the liability must be calculated as the present value of the future payments.

Question 6

Present and future value tables of $1 at 11% are presented below.

-Titanic Corporation leased executive limousines under terms of $20,000 to be paid at the inception of the lease, and four equal annual payments of $30,000 to each be paid thereafter 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.

Accepted Answer

PVA = $30,000 × 3.10245* = $93,074
$93,074 × 11% = $10,238
*PVA of $1: n = 4; i = 11%

Question 7

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.

Accepted Answer

A deferred annuity is a type of annuity where the series of equal periodic payments starts more than one period after the agreement. An annuity due starts immediately, while an ordinary annuity starts at the end of the first period. A future annuity is not a recognized term in finance.

Question 8

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.

Accepted Answer

An ordinary annuity involves payments that are made at the end of each period. Since the first payment is made one period after the contract begins, it fits the definition of an ordinary annuity.

Question 9

Present and future value tables of $1 at 9% are presented below.

-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.

Accepted Answer

FVA = $5,000 × 5.9847* = $29,924
*FVA of $1: n = 5; i = 9%

Question 10

Present and future value tables of $1 at 9% are presented below.

-LeAnn wishes to know how much she should 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.

Accepted Answer

$5,000 × (PV of $1: n = 4, i = 7%) = Amount to Invest

Question 11

Present and future value tables of $1 at 9% are presented below.

-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.

Accepted Answer

PV = $10,000 × 0.64993* = $6,499
*PV of $1: n = 5; i = 9%

Question 12

Present and future value tables of $1 at 11% are presented below.

-On October 1, 2018, 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, 2019. 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.

Accepted Answer

PVA = $500,000 × 3.69590* = $1,847,950
*PVA of $1: n = 5; i = 11%

Question 13

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.

Accepted Answer

An annuity due is simply an ordinary annuity with payments made at the beginning of each period instead of at the end. Therefore, the future value of an annuity due will always be greater than the future value of an ordinary annuity with the same payments and interest rate. 
To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity, we can use the formula FVAD=FVOA(1+i), where FVAD is the future value of an annuity due, FVOA is the future value of an ordinary annuity, i is the interest rate, and the parentheses indicate multiplication. 
We want to find the FVAD factor, which represents the future value of an annuity due per dollar of payment. We can rearrange the formula as FVAD/FVOA = 1+i and then solve for FVAD/FVOA. We can then use the future value factor for an ordinary annuity to find the future value factor for an annuity due.
Therefore, we need to obtain the FVA factor for n + 1 and deduct 1 to account for the extra period of compounding in an annuity due. This gives us the FVAD factor for period n.

Question 14

Present and future value tables of $1 at 11% are presented below.

-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.

Accepted Answer

PV = $200,000 × 0.59345* = $118,690
*PV of $1: n = 5; i = 11%

Question 15

Present and future value tables of $1 at 9% are presented below.

-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.

Accepted Answer

$10,000 ÷ 4.9847* = $2,006
*FVAD of $1: n = 4; i = 9%

Question 16

Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be:
A) Earlier than Loan B.
B) Later than Loan B.
C) The same as Loan B.
D) Indeterminate with respect to Loan B.

Accepted Answer

A loan structured as an annuity due has payments due at the beginning of each period, while a loan structured as an ordinary annuity has payments due at the end of each period. Because the payments for Loan A are made earlier than the payments for Loan B, Loan A will reach maturity earlier than Loan B.

Question 17

Mary Alice just won the lottery and is trying to decide between the options of receiving the annual cash flow payment option of $250,000 per year for 25 years beginning today, or receiving one lump-sum amount today. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $6,250,000.
B) $3,195,840.
C) $3,637,590.
D) $3,387,590.

Accepted Answer

$250,000 × 13.55036* = $3,387,590
*PVAD of $1: n = 25; i = 6%

Question 18

Present and future value tables of $1 at 9% are presented below.

-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.

Accepted Answer

$42,000 × 0.32197* = $13,523 (rounded)
*PV of $1: n = 10; i = 12%

Question 19

Present and future value tables of $1 at 9% are presented below.

-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.

Accepted Answer

11ea937b_363f_e990_a419_6dce59d58faf_TB2599_00

Question 20

Which of the following must be known in order to compute the interest rate when 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.

Accepted Answer

In order to compute the interest rate when financing an asset purchase with an annuity, we need to know the present value of the annuity, the dollar amount and timing of the annuity payments. This information is required to calculate the interest rate using the formula for the present value of an annuity. The fair value of the asset purchased is not relevant to calculating the interest rate, and the future value of the annuity is also not necessary.

Quiz 6: Time Value of Money Concepts

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? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

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

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

Present and future value tables of $1 at 9% are presented below. -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?

Present and future value tables of $1 at 9% are presented below. -LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

Present and future value tables of $1 at 9% are presented below. -How much must be invested now at 9% interest to accumulate to $10,000 in five years?

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

Present and future value tables of $1 at 11% are presented below. -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?

Present and future value tables of $1 at 9% are presented below. -How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be:

Which of the following must be known in order to compute the interest rate when financing an asset purchase with an annuity?