Question 1

Which of the following accounting problems does not involve a present value calculation?

Accepted Answer

Declining-balance depreciation expense is a method of calculating depreciation based on a fixed percentage of the non-depreciated balance. It does not involve a present value calculation. The other options mentioned do involve present value calculations.

Question 2

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?

Accepted Answer

The answer of If Sloane Joyner invests $10,514.81 now and...

Question 3

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is

Accepted Answer

The present value is calculated by discounting the future cash flows at a discount rate. As the discount rate increases, the present value decreases, and vice versa. Therefore, if the discount rate is increased, the present value of $10,000 to be received in 5 years will be smaller.

Question 4

The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is

Accepted Answer

To find the present value (the amount you must deposit now) to accumulate a future sum, you use the formula for the present value of a single sum: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($6000), r is the interest rate per period (6% or 0.06), and n is the number of periods (5 years). Plugging in the values: PV = $6000 / (1 + 0.06)^5 ≈ $4484.

Question 5

Present value is based on

Accepted Answer

Present value takes into account the dollar amount to be received, the length of time until the amount is received, and the interest rate. All three factors are important in determining the present value of a future payment.

Question 6

If the single amount of $4,000 to be received in 2 years is discounted at 11%, its present value is

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. Plugging in the values: PV = $4,000 / (1 + 0.11)^2 = $3,246.

Question 7

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

Accepted Answer

The year the payments begin does not affect the computation of the future value of an annuity. The amount of the periodic payments, interest rate, and number of compounding periods are all vital in computing the future value of an annuity.

Question 8

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?

Accepted Answer

The answer of Dexter Company is considering purchasing equipment. The...

Question 9

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

Accepted Answer

A higher discount rate reduces the present value of future cash flows more than a lower discount rate. Therefore, among the given options, 10% will produce the smallest present value.

Question 10

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

Accepted Answer

Using the present value formula, 
PV = FV/ (1+i)^n, 
where PV is the present value, FV is the future value, i is the interest rate, and n is the number of periods.

PV = 3,000 / (1 + 0.06)^3
PV = 3,000 / 1.191016
PV = $2,518.73

Rounding up to the nearest dollar gives a present value of $2,519, which is option A.

Question 11

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?

Accepted Answer

We can solve for the number of annual payments using the future value of an annuity formula:

FV = (PMT * ((1 + r)^n - 1) / r)

Where:
PMT = $5,000 (the annual payments)
r = 10%
FV = $35,516.80 (the future value of the initial investment)

Plugging in these values, we get:

$35,516.80 = ($5,000 * ((1 + 0.1)^n - 1) / 0.1)

Simplifying this equation, we get:

7.10336 = (1.1^n - 1)
1.1^n = 8.10336
n = log(8.10336) / log(1.1)
n = 13.13

So Peter will receive 13 annual payments before the initial investment is depleted. Rounded up, this gives us a total of 13 payments. Therefore, the best choice is (C).

Question 12

Suppose you have a winning lottery ticket and you have 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

Accepted Answer

To find the present value of the prize, we need to use the formula:

Present value = Future value / (1 + r)^n
where r is the discount rate and n is the number of years.

Plugging in the values, we get:

Present value = 3,000,000 / (1 + 0.06)^3
= 3,000,000 / 1.191016
= $2,518,858 (rounded to nearest dollar)

Therefore, the best choice is to take the present value of the prize now, which is $2,518,858.

Question 13

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

Accepted Answer

The process of determining the present value involves discounting future cash flows, which involves applying a discount rate to the future cash flow amounts. This process is called discounting. Therefore, option D is the correct choice. Options A, B, and C do not accurately describe the process of determining the present value.

Question 14

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?

Accepted Answer

Using the formula:
Final amount = Initial amount x (1 + rate of return)
15,000 = Initial amount x (1 + 0.15)
15,000 = Initial amount x 1.15
Initial amount = 15,000/1.15
Initial amount = $13,043.48
Rounded to the nearest dollar, the answer is $13,044, which is choice D.

Question 15

The future value of an annuity factor for 2 periods is equal to

Accepted Answer

The answer of The future value of an annuity factor...

Question 16

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?

Accepted Answer

The answer of If you are able to earn an...

Question 17

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?

Accepted Answer

This is an example of a future value of an annuity problem. We can use the formula:
FV = PMT x [(1 + r)^n - 1)/r]
where FV is the future value, PMT is the regular payment, r is the interest rate per period, and n is the number of periods.

Plugging in the given values, we get:
FV = $30,000 x [(1 + 0.05)^10 - 1]/0.05
FV = $30,000 x 12.578
FV = $377,337

Therefore, the balance of the account at the end of 10 years is $377,337. Answer choice C is correct.

Question 18

Suzy Douglas has been offered an investing opportunity which requires an immediate deposit of $73,540 and will earn 8% per year. At the end of the investment's life it will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000?

Accepted Answer

The answer of Suzy Douglas has been offered an investing...

Question 19

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 3 years is

Accepted Answer

The formula for calculating the present value of a future amount is:

Present Value = Future Value / (1 + interest rate)^n

Where:
- Future Value = $10,000
- Interest Rate = 5% = 0.05 (decimal)
- n = 3 years

Plugging in these values we get:

Present Value = $10,000 / (1 + 0.05)^3 = $8,637.90

Therefore, the amount you must deposit now is $8,638 (rounded up to the nearest cent), which is closest to choice C.

Question 20

In order to compute the present value of an annuity, it is necessary to know the

Accepted Answer

The present value of an annuity is determined by discounting the future cash flows (the periodic payments) back to their present value using a discount rate. Therefore, both the discount rate and the number of discount periods and the amount of the periodic payments/receipts are necessary to compute the present value of an annuity.

Quiz 15: Accounting and Financial Reporting for Contingent Liabilities and Leases