Deck 14: Time Value of Money

Question 1

Ordinary annuity investments provide multiple receipts of an unequal amount at fixed year-end intervals over the investment's duration.

Answer 1

False

Question 2

Most business decision makers solve present-value problems with Excel because the present-value tables are limited to the interest rates in the columns and the number of periods in the rows.

Answer 2

True

Question 3

The interest paid on a bond is NOT an annuity because it occurs periodically.

Answer 3

False

Question 4

The present value of a bond-its market price-is the present value of the future principal amount at maturity plus the present value of the future stated interest payments.

Question 5

The term future value means the sum of money that an investment will be "worth" at a specified time in the future,assuming a certain interest rate.

Question 6

The difference between the future value of an investment and the original investment is the amount of interest revenue that will be earned.

Question 7

Interest,the cost of using money,is recorded as interest revenue by the borrower.

Question 8

When the market interest rate is equal to the face interest rate on bonds,the present value of the bonds will be less than the bond's face value at the date of sale of the bonds.

Question 9

The process of determining the present value of a sum of money is called discounting because the present value of a sum of money is more than the future value of a sum of money.

Question 10

Compound interest is only the interest you earn on your principal amount.

Question 11

The present value of a single amount in the future can be determined using a present value of $1 table.

Question 12

The term time value of money refers to the fact that money earns interest over time.

Question 13

Interest is the cost of using money.

Question 14

Whether making investments or borrowing money,we don't need to recognize the interest
we receive or pay.

Question 15

An ordinary annuity is an investment that provides multiple receipts of an equal amount at fixed year-end intervals over the investment's duration.

Question 16

The time value of money plays a key role in measuring the value of certain long-term investments as well as long-term debt.

Question 17

Most businesses ignore compound interest when calculating interest on debt or investments.

Question 18

The term present value means today's value of a future payment or a series of future payments,assuming that those payments include interest at the current market rate.

Question 19

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

A)interest rate.
B)length of time between investment and future payment or receipt.
C)amount of initial payment or receipt.
D)maturity value.

Question 20

The principal,when investing in a bond,is a single amount to be received by the investor and paid by the debtor at maturity.

Question 21

To calculate the future value of an investment,you need ________ inputs.

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

Question 22

On January 1,2019,bonds with a face value of $94,000 were sold.The bonds mature on January 1,2029.The face interest rate is 8% annually.The bonds pay interest semiannually on July 1 and January 1.The market rate of interest is 10% annually.What is the market price of the bonds on January 1,2019? The present value of $1 for 20 periods at 5% is 0.377.The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462.The present value of $1 for 10 periods at 10% is 0.463.The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145.(Round your final answer to the nearest dollar. )

A)$82,295
B)$66,627
C)$94,000
D)$97,760

Question 23

Tanko Financing leases phones to various companies for business use.Tanko has just signed a 2-year lease agreement that requires annual year-end lease payments of $340,000.The present value of $1 for 2 periods at 5% is 0.907.The present value of an ordinary annuity of $1 for 2 periods at 5% is 1.859.What is the present value of the lease when the lease commences using a 5% interest rate?

A)$680,000
B)$340,000
C)$632,060
D)$308,380

Question 24

On January 1,2018,bonds with a face value of $72,000 were sold.The bonds mature on January 1,2028.The face interest rate is 6%.The bonds pay interest semiannually on July 1 and January 1.The market rate of interest is 10%.What is the market price of the bonds on January 1,2018? The present value of $1 for 20 periods at 5% is 0.377.The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462.The present value of $1 for 20 periods at 3% is 0.554.The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.878.(Round your final answer to the nearest dollar. )

A)$54,062
B)$74,160
C)$72,024
D)$72,000

Question 25

You have won $4,400,000 in a lottery.Your winnings will be paid to you in equal annual year-end installments of $440,000 over 10 years.You estimate that you can earn 6% on your investments.The present value of $1 for 10 periods at 6% is 0.558.The present value of an ordinary annuity of $1 for 10 periods at 6% is 7.36.The present value of your $4,400,000 winnings would be closest to:

A)$4,400,000.
B)$3,238,400.
C)$2,978,800.
D)$3,850,000.

Question 26

The future value of an investment that pays interest will always be:

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

Question 27

What is the future value of a single $4,800 investment today that pays interest of 6% compounded annually for the next 3 years? (Round all intermediary calculations and final calculations to the nearest whole dollar. )

A)$5,717
B)$5,088
C)$5,393
D)$4,800

Question 28

Smith Financing leases cars to car rental companies.Smith has just signed a 5-year lease agreement that requires annual year-end lease payments of $470,000.The present value of $1 for 5 periods at 6% is 0.747.The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212.What is the present value of the lease when the lease commences using a 6% interest rate?

A)$1,979,640
B)$2,350,000
C) $$2,173,750
D)$1,588,600

Question 29

You are calculating the present value of $10,000 that you will receive five years from now. Which table will you use to calculate the present value of that $10,000?

A)Present Value of $1 table
B)Future Value of $1 table
C)Present Value of Ordinary Annuity of $1 table
D)Future Value of Ordinary Annuity of $1 table

Question 30

A single amount of $10,500 is to be received in 3 years.If the single amount is discounted at 8% for 3 periods,the present value is ________.The present value of $1 for 3 periods at 8% is 0.794.The present value of an ordinary annuity of $1 for 3 periods at 8% is 2.577.(Round your final answer to the nearest dollar. )

A)$8,316
B)$10,500
C)$8,337
D)$27,059

Question 31

You have won $1,250,000 in a lottery.Your winnings will be paid to you in equal annual year-end installments of $250,000 over 5 years.You estimate that you can earn 4% on your investments.The present value of $1 for 5 periods at 4% is 0.822.The present value of an ordinary annuity of $1 for 5 periods at 4% is 4.452.The present value of your $1,250,000 winnings would be closest to:

A)$1,113,000.
B)$205,500.
C)$1,027,500.
D)$1,250,000.

Question 32

In present value calculations,the process of determining the present value of a single sum of money is called:

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

Question 33

Which of the following discount rates will produce the smallest present value of a single sum of money?

A)4%
B)6%
C)7%
D)9%

Question 34

You are calculating the present value of $15,000 that you will receive at the end of every year for the next ten years.Which table will you use to obtain the present value of those $15,000 payments you will be receiving?

A)Present Value of $1 table
B)Future Value of $1 table
C)Present Value of Ordinary Annuity of $1 table
D)Future Value of Ordinary Annuity of $1 table

Question 35

A single amount of $6,400 is to be received in 4 years.If the single amount is discounted at 8% for 4 periods,the present value is ________.The present value of $1 for 4 periods at 8% is 0.735.The present value of an ordinary annuity of $1 for 4 periods at 8% is 3.312.(Round your final answer to the nearest dollar. )

A)$4,704
B)$5,376
C)$6,400
D)$21,197

Question 36

You have received a settlement offer from an automobile manufacturer due to mechanical problems with your automobile.The manufacturer will pay you $49,000 in one lump sum five years from now.You can earn 6% on your investments.The present value of $1 for 5 periods at 6% is 0.747.The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212.The present value of the manufacturer's settlement offer is closest to:

A)$36,015.
B)$49,000.
C)$36,603.
D)$206,388.

Question 37

Cooper Company has purchased equipment that requires annual payments of $18,000 to be paid at the end of each of the next 6 years.The discount rate is 8%.The present value of $1 for six periods at 8% is 0.630.The present value of an ordinary annuity of $1 for six periods at 8% is 4.623.What amount will be assigned to the equipment at the purchase date? (Round your final answer to the nearest dollar. )

A)$3,894
B)$83,214
C)$94,554
D)$11,340

Question 38

You have received a settlement offer from a restaurant for your medical expenses due to food poisoning.The restaurant will pay you $110,000 in one lump sum two years from now.You can earn 10% on your investments.The present value of $1 for 2 periods at 10% is 0.826.The present value of an ordinary annuity of $1 for 2 periods at 10% is 1.736.The present value of the settlement offer is closest to:

A)$220,000.
B)$110,000.
C)$190,960.
D)$90,860.

Question 39

A single amount of $4700 is to be received in 3 years.If the single amount is discounted at 6% for 3 periods,the present value is ________.The present value of $1 for 3 periods at 6% is 0.840.The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.673.(Round your final answer to the nearest dollar. )

A)$3948
B)$4418
C)$4700
D)$12,563

Question 40

Which of the following statements regarding the concept of present value is INCORRECT?

A)Compound interest is not only interest earned on the principal amount but also the interest received on the interest already earned.
B)Ordinary annuity investments provide multiple receipts of an equal amount at fixed year-end intervals over the investment's duration.
C)When using the Present Value of Ordinary Annuity of $1 table,multiply the factor times the amount that will be received at the end of each year times the number of years the amount will be received.
D)The present value of a bond is the present value of the principal amount at maturity plus the present value of the stated interest payments.

Question 41

On January 1,2018,bonds with a face value of $100,000 were sold.The bonds mature on January 1,2028.The face interest rate is 6%.The bonds pay interest semiannually on July 1 and January 1.The market rate of interest is 10%.What is the market price of the bonds on January 1,2018? The present value of $1 for 20 periods at 5% is 0.377.The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462.The present value of $1 for 20 periods at 3% is 0.554.The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.877.(Please show all work and round your final answer to the nearest dollar. )