Deck 14: Time Value of Money

Question 1

All of the following are necessary to compute the future value of a single amount except the

A)interest rate.
B)number of periods.
C)principal.
D)maturity value.

Answer 1

maturity value.

Question 2

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 three years is

A)$8,500.
B)$7,830.
C)$8,638.
D)$8,860.

Answer 2

$8,638.

Question 3

Bill Cigarettes acquired a bad habit of smoking in high school.Bill spends approximately $70 a month or $840 a year on cigarettes.He is not concerned with health issues, but he is keenly aware of financial issues.Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking.

Answer 3

Use Table 2
$840 × 45.76196 (20 periods and 8%) = $38,440.05.

Question 4

Which table has a factor of 1.00000 for 1 period at every interest rate?

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

Question 5

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

A)increased.
B)decreased.
C)not changed.
D)equal to the stated rate of interest.

Question 6

Robin Clark buys one avocado each week (4 per month) at an average cost of $2.50 per avocado.Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of buying avocados.

Question 7

Interest is the difference between the amount borrowed and the principal.

Question 8

McGoff Company deposits $20,000 in a fund at the end of each year for five years.The fund pays interest of 4% compounded annually.The balance in the fund at the end of five years is computed by multiplying

A)$20,000 by the future value of 1 factor.
B)$100,000 by 1.04.
C)$100,000 by 1.20.
D)$20,000 by the future value of an annuity factor.

Question 9

Dexter Company is considering purchasing equipment.The equipment will produce the following cash flows: 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

Question 10

Lamb Company deposited $15,000 annually for six years in an account paying 5% interest compounded annually.What is the balance of the account at the end of the 6th year?

Question 11

Compound interest is computed on the principal and any interest earned that has not been paid or received.

Question 12

The future value of an annuity factor for two periods is equal to

A)1 plus the interest rate.
B)2 plus the interest rate.
C)2 minus the interest rate.
D)2.

Question 13

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%

Question 14

Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000.The deposits are made at the end of each year to a fund paying 5% interest compounded annually.What amount will be in the sinking fund at the end of the 10 years?

Question 15

The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.

Question 16

If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years?

A)$48,867
B)$315,000
C)$377,337
D)$450,000

Question 17

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

Question 18

Compute the future value of $6,000 invested every year at an interest rate of 9%.You invest the money for 20 years with the first payment made at the end of the year.

Question 19

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.

Question 20

Which of the following is not necessary to know in computing the future value of an annuity?

A)Amount of the periodic payments
B)Interest rate
C)Number of compounding periods
D)Year the payments begin

Question 21

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

Question 22

Match the items (1-5) by entering the appropriate code letter in the space provided.

Question 23

The process of determining the present value is referred to as discounting the future amount.

Question 24

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

A)allocating.
B)pricing.
C)negotiating.
D)discounting.

Question 25

In order to compute the present value of an annuity, it is necessary to know the 1.discount rate.2.number of discount periods and the amount of the periodic payments or receipts.

A)1
B)2
C)both 1 and 2
D)something in addition to 1 and 2

Question 26

A higher discount rate produces a higher present value.

Question 27

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.

Question 28

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

Question 29

In computing the present value of an annuity, it is not necessary to know the number of discount periods.

Question 30

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.

Question 31

Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next four 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

Question 32

The present value of a long-term note or bond is a function of two variables.

Question 33

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

Question 34

Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next six 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

Question 35

The present value of an annuity is the value now of a series of future receipts or payments, discounted assuming compound interest.

Question 36

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

Question 37

John Reynolds deposited $10,000 in an account paying interest of 4% compounded annually.What amount will be in the account at the end of four years?

Question 38

With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.

Question 39

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

A)$1,818.
B)$1,623.
C)$1,802.
D)$2,754.

Question 40

Wingate Company borrowed $90,000 on January 2, 2020.This amount plus accrued interest of 6% compounded annually will be repaid at the end of three years.What amount will Wingate repay at the end of the third year?

Question 41

Compound interest is the return on principal

A)only.
B)for one or more periods.
C)plus interest for two or more periods.
D)for one period.

Question 42

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

A)$2,519.
B)$2,830.
C)$2,600.
D)$2,820.

Question 43

Pleasant Company has decided to begin accumulating a fund for plant expansion.The company deposited $80,000 in a fund on January 2, 2019.Pleasant will also deposit $40,000 annually at the end of each year, starting in 2019.The fund pays interest at 4% compounded annually.What is the balance of the fund at the end of 2023 (after the 2023 deposit)?

Question 44

The factor 1.0609 is taken from the 3% column and 2 periods row in a certain table.From what table is this factor taken?

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

Question 45

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

A)8%
B)9%
C)10%
D)4%

Question 46

Mandy How plans to buy an automobile and can deposit $3,000 toward the purchase today.If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in three years?

Question 47

If $40,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of five years?

A)$32,878
B)$48,000
C)$48,620
D)$48,666

Question 48

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.

Question 49

Rob Honda plans to buy a home and can deposit $15,000 for the purchase today.If the annual interest rate is 8%, how much can Rob expect to have for a down payment in five years?

Question 50

The future value of 1 factor will always be

A)equal to 1.
B)greater than 1.
C)less than 1.
D)equal to the interest rate.

Question 51

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

A)$1,200.
B)$4,484.
C)$4,477.
D)$4,200.

Question 52

Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their recently born granddaughter, Sloane Martin.They will make these deposits on December 31st of each year.Bill and Ellen feel they can safely earn 8%.How much will be in this account on December 31 of the 18th year?