Deck 14: Time Value of Money

Question 1

Cash flows that are equal and occur multiple times, one period apart are called Annuities.

Answer 1

True

Question 2

The Future Value is the amount to which an account may grow when interest is compounded.

Answer 2

True

Question 3

The future value of a single amount is the original cash flow plus simple interest as of a specific future date.

Answer 3

False

Question 4

Compound interest is a method of calculating the time value of money in which interest
is earned on the previous periods' interest.

Question 5

The journal entry to record the interest income from an annuity would include a

A)debit to interest income.
B)credit to interest income.
C)debit to interest expense.
D)None of the above.

Question 6

Calculations of future values are projections of the future balance based upon

A)past cash flows.
B)future cash flows.
C)past and future cash flows.
D)expected future cash flows.

Question 7

Interest may only be charged to a borrower by a bank.

Question 8

When determining the future value of an annuity, cash flows are presumed to occur

A)at the start of the first period.
B)at the end of the first period.
C)when the interest is received.
D)at the maturity date.

Question 9

If the stated interest rate is 12% per year, but it is compounded semiannually, then the adjusted rate used for present or future value calculations will be

A)12% per year.
B)3% per quarter.
C)6% per 6-month period.
D)1% per 6-month period.

Question 10

When the present value of an annuity is calculated, which of the following is not required?

A)The number of cash flows.
B)The interest of discount rate per period.
C)The future value of the cash flows.
D)The amount of each repeating cash flow.

Question 11

When a contract establishes a relationship between an amount borrowed and one or more future cash flows, the initial amount is known as

A)future value.
B)present value.
C)an annuity.
D)interest rate.

Question 12

Compound interest is computed on which of the following?

A)Only the original amount.
B)The original amount and any undistributed interest earned in prior periods.
C)The original amount and any distributed or undistributed interest earned in prior periods.
D)Only the distributed and undistributed interest earned in prior periods.

Question 13

Interest is the time value of money.

Question 14

In transactions involving the borrowing or lending of money, as interest is paid, the balance in the liability account of the borrower

A)decreases.
B)increases.
C)remains unchanged.
D)is transferred to interest income

Question 15

When the calculated present value is reversed, the resulting figure is the

A)interest accrued.
B)future value.
C)total interest earned.
D)total interest paid.

Question 16

The present value of an annuity is the discounted future value of cash flows made at regular intervals.

Question 17

The first cash flow in the future value of an annuity occurs when?

A)At the start of the first period.
B)At the maturity date of the loan.
C)When interest is collected.
D)At the end of the first period.

Question 18

The interest rate is the percentage that is multiplied by the future value to yield the amount of interest for that period.

Question 19

The initial amount of money borrowed or loaned is also known as the future value of cash flows.

Question 20

The interest period is the time interval between interest calculations.

Question 21

Jay has made a deal with his daughter to start a car fund for when she graduates college in 6 years. He has found an investment that will yield an interest rate of 8% per year. If he wants to have $25,000 to spend on the car for his daughter, how much must he initially invest?

A)$15,754.28
B)$16,113.45
C)$13,772.55
D)$14,038.95

Question 22

Mark is planning on making an investment in a new computer system. He wants to know how much he must invest to have $9,000 in 4 years if the interest rate is 5% per year?

A)$10,939.59
B)$2,479.41
C)$7,826.83
D)$7,404.30

Question 23

An investor expects to receive 10 payments of $5,000 each made at the end of each period. If interest is compounded at 5% annually, what is the future value of these payments?

A)$3,069.55
B)$7,387.30
C)$38,608.65
D)$62,889.45

Question 24

Manatee Manufacturing sells a piece of equipment to make room for new machinery. Manatee will receive the sales price of $50,000 at the end of 4 years. Assuming interest at a rate of 6% per year, the Present Value of this future cash flow is how much?

A)$39,604.50
B)$39,515.50
C)$63,124.00
D)$173,255.50

Question 25

Mark would like to retire in 25 years. If he deposits $10,000 at the end of each of the next 25 years into an account earning 7% interest, how much will he have in this account at the end of 25 years?

A)$250,000
B)$758,292.17
C)$632,490.40
D)$291,339.50

Question 26

Chris Hines invested $12,000 in a municipal bond. The bond pays 8% interest and matures in 3 years. How much money will Chris have at maturity?

A)$22,211,16
B)$15,116.52
C)$36,960.00
D)$38,596.80

Question 27

Harlan Fuller needs $2,000 in 7 years. What amount must he invest in a 6% savings bond?

A)$1,425.98
B)$1,330.12
C)$9,533.08
D)$8,200.40

Question 28

Chuck is looking to invest $15,000 now so that he can purchase a new car in 4 years. The expected price of the car, after tax, title and registration, is expected to be $18,232.65. What is the interest rate required on Chuck's investment to achieve this amount?

A)4%
B)5%
C)6%
D)7%

Question 29

What is the interest rate of a single $20,000 cash flow in 3 years if the present value is $15,443.60?

A)7%
B)8%
C)9%
D)10%

Question 30

Tom liquidates an investment, and his proceeds will be received in 8 annual payments of $10,000 each with interest computed at 7%. What is the Present Value of this Annuity?

A)$89,228.00
B)$59,713.00
C)$17,181.90
D)$5,820.10

Question 31

Betty has received an inheritance from her uncle. She would like to invest some of the inheritance to pay for her son's college. To pay for college she will need to withdraw $25,000 per year for 4 years beginning 1 year from today. How much must she invest if she can earn 5%?

A)$77,397.37
B)$20,567.50
C)$31,913.55
D)$88,648.75

Question 32

Eric is considering buying a car. He can either purchase the car outright or make 5 annual payments of $10,000 at the end of each year. If the interest rate is 7%, how much is the outright purchase price?

A)$14,025.50
B)$7,129.90
C)$41,002.00
D)$57,863.70

Question 33

Tom Nelson invested $9,000 into an account yielding 6%. How long must he leave the money in the account to obtain $12,060.90?

A)2 years
B)3 years
C)4 years
D)5 years

Question 34

Hanson's Pilings is planning to purchase a new dredge pump in 4 years. Billy Hanson, the owner, invests $11,800 in an account that pays 8% interest compounded quarterly. How much will Mr. Hanson have in the account at the end of 4 years?

A)$14,864.58
B)$16,198.92
C)$16,053.78
D)$21,840.97

Question 35

You just won the lottery and have elected to receive 10 annual payments instead of the lump sum of $74,818.59. Calculate the amount of your annual payment assuming a 6% interest rate.

A)$17,178.90
B)$10,165.44
C)$18,000.00
D)$10,832.11

Question 36

Tom is saving for an engagement ring. If he deposits $500 payments into an account (one at the end of each year)that earns 6% interest compounded annually, how much will he have saved by the end of the 10^th year?

A)$895.42
B)$13,435.18
C)$6,590.39
D)$6,554.39

Question 37

Merlin is saving money to purchase a new car. If he deposits $5,000 into a saving account that pays 8% interest, compounded semi-annually, how much will he have in his account at the end of the first year?

A)$5,400.00
B)$5,200.00
C)$5,408.00
D)$5,008.00

Question 38

An investor expects to receive payments of $3,000 every 6 months for the next 7 years. If the market rate of interest is 4% per year compounded semi-annually, what is the future value of these payments?

A)$22,302.84
B)$23,694.87
C)$47,921.82
D)$54,875.73

Question 39

Julie expects to receive payments of $1,200 at the end of the year for the next 3 years. Assuming Julie invests the payments into an account earning 8%, how much will she have at the end of the 3 years?

A)$3,985.68
B)$3,600.00
C)$10,670.81
D)$3,092.52

Question 40

Jack and Jill are saving for a house. How much will they have saved if they make 8 deposits of $5,000 each (one at the end of each year)into an account that earns 4% interest compounded annually?

A)$51,169.86
B)$63,732.74
C)$46,071.15
D)$49,506.11

Question 41

Wanda Ward makes an investment of $11,800, which pays 8% interest that is compounded quarterly. How much interest will have accrued at the end of 48 months?

Question 42

The _______________ treats the present value as a liability that will be paid through a series of equal payments.

Question 43

Marvin's Manufacturing can invest in a new process, but will need to purchase new equipment. The cost of the equipment is $75,000 and needs to be in place in 8 years. The company invests the money at 8% interest compounded semiannually. How much will they need to invest in order to have $75,000 in 8 years?

Question 44

Cash flows are described as either single cash flows or _______________.

Question 45

Beach Catering sold its business for $75,000 under an asset purchase agreement. Under the agreement, the buyer made an initial payment of $35,000 which Beach Catering invested at 6% compounded semiannually. At the beginning of the fourth year, the balance of the purchase price was paid by the buyer. Beach Catering places this $40,000 in the same investment with interest compounded semiannually at 6%. At the end of 6 years, how much does Beach Catering have in its investment account?

Question 46

The amount to which an account will grow when interest is compounded is the ______________ value.

Question 47

In present value problems, the interest rate is also called the __________________.