Question 1

In present value calculations, the process of determining the present value is called
A)allocating.
B)pricing.
C)negotiating.
D)discounting.

Accepted Answer

The process of determining the present value involves discounting future cash flows to their present value. Therefore, the correct choice is D) discounting.

Question 2

Dexter Company is considering purchasing equipment.The equipment will produce the following cash flows: $$\begin{array} { l l } 
\text { Year 1 } & \$ 120,000 \
\text { Year 2 } & \$ 200,000
\end{array}$$ 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

Accepted Answer

The maximum price Dexter should pay is the present value of the cash flows at the required rate of return. The present value of Year 1 cash flow is $120,000 / (1+0.10) = $109,091, and Year 2 is $200,000 / (1+0.10)^2 = $165,290. Adding these gives $274,381.

Question 3

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.

Accepted Answer

Present value is based on all three factors - the dollar amount to be received, the length of time until the amount is received, and the interest rate.

Question 4

If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is
A)$2,519.
B)$2,830.
C)$2,600.
D)$2,820.

Accepted Answer

Using the present value formula, 
PV = FV / (1+r)^n
where 
FV = future value = $3,000
r = interest rate = 6% = 0.06
n = number of years = 3
PV = 3000 / (1+0.06)^3
PV = $2,519.

Question 5

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

Accepted Answer

To find the number of years Suzy must wait to receive $200,000, we can use the formula for the future value of a single sum, which is $FV = PV(1 + r)^n$, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Rearranging the formula to solve for n gives us $n = \frac{\log(FV/PV)}{\log(1 + r)}$.Plugging in the values from the question:- $FV = $200,000$- $PV = $73,540$- $r = 8\% = 0.08$We get $n = \frac{\log(200000/73540)}{\log(1.08)}$.Calculating this gives us approximately 13 years.

Question 6

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.

Accepted Answer

To calculate the present value of the prize, we can use the formula PV = FV / (1+r)^n, where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years. 
Using this formula, we get PV = 3,000,000 / (1+0.06)^3 = 2,518,860. Therefore, the best choice would be to take the present value now, which is $2,518,860.

Question 7

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%

Accepted Answer

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

Question 8

Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 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

Accepted Answer

The present value of an annuity formula can be used to calculate the amount that should be recorded for the equipment. 
PV = PMT x ((1 - (1 / (1 + r)^n)) / r)
Where PV = present value, PMT = payment amount, r = discount rate, and n = number of payments.

Plugging in the given values, we get: 
PV = $30,000 x ((1 - (1 / (1 + 0.12)^6)) / 0.12) 
PV = $30,000 x ((1 - 0.51316) / 0.12) 
PV = $30,000 x 3.7903 
PV = $113,709

Therefore, the amount that should be recorded for the equipment is $123,342 (rounded to the nearest dollar). Choice B is the correct answer.

Question 9

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

Accepted Answer

Using the formula for compound interest we have:
$15000 = P(1+0.15)
Solving for P:
P = $13043.48
Therefore the closest answer is D, which is $13044.

Question 10

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.

Accepted Answer

The determination of declining-balance depreciation expense does not involve present value calculation as it is a method of calculating depreciation based on a fixed percentage rate applied to the fixed asset's book value. The other options involve present value calculations to some extent. The determination of the market price of a bond involves calculating the present value of its future cash flows. The determination of the amount to report for long-term notes payable involves calculating the present value of the future payments of interest and principal. The determination of the amount to report for lease liabilities also involves calculating the present value of future lease payments.

Question 11

Which of the following discount rates will produce the smallest present value?
A)8%
B)9%
C)10%
D)4%

Accepted Answer

The smaller the discount rate, the larger the present value. Therefore, the largest discount rate (C) will produce the smallest present value.

Question 12

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

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 13

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

Accepted Answer

The number of discount periods and the amount of the periodic payments or receipts are both important factors in calculating the present value or future value of an investment. Therefore, both 1 and 2 are important considerations.

Question 14

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is
A)increased.
B)decreased.
C)not changed.
D)equal to the stated rate of interest.

Accepted Answer

As the discount rate increases, the present value of an amount to be received in the future decreases. This means that the $10,000 to be received in 5 years will be smaller if the discount rate is increased. Therefore, choice A is the best choice.

Question 15

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

Accepted Answer

We need to find the present value of a $10000 6% 5-year note payable that pays interest quarterly. Therefore, we need to use tables that show the periodic interest for quarterly payments. That is, we need the interest rate per quarter. The formula to calculate this interest rate is:

(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%

Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.

Question 16

If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is
A)$1,818.
B)$1,623.
C)$1,802.
D)$2,754.

Accepted Answer

Using the formula for present value of a single amount: PV = FV / (1 + r)^n, we have PV = 2,000 / (1 + 0.11)^2 = $1,623.

Question 17

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

Accepted Answer

To calculate the number of annual payments Peter will receive, we need to use the present value of an annuity formula:

PV = PMT x ((1 - (1 + r)^-n)/r)

where PV is the present value, PMT is the annual payment, r is the interest rate and n is the number of payments.

Rearranging the formula to solve for n:

n = -log(1 - (PV x r)/PMT)/log(1 + r)

Substituting the given values:

PV = $35,516.80
PMT = $5,000
r = 10%

n = -log(1 - ($35,516.80 x 0.1)/$5,000)/log(1 + 0.1) = 12.91

Therefore, Peter will receive 13 annual payments.

Question 18

Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 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

Accepted Answer

The present value of an annuity can be calculated using the formula PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment, r is the discount rate, and n is the number of periods. Plugging in the given values (PMT = $40,000, r = 0.15, n = 4), the calculation gives a present value of approximately $114,199.

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

Accepted Answer

We can use the formula for future value of a present sum to solve for the amount to deposit:
$10,000 = P(1 + 0.05)^3
$10,000 = P(1.157625)
P = $8,638.23
Therefore, the best choice is (C) $8,638.

Question 20

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

Accepted Answer

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

Quiz 15: Time Value of Money

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

Present value is based on

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

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?

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?

Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years.The appropriate discount rate is 12%.What amount will be used to record the equipment?

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?

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

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

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

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.

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

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?

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

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?

Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years.The appropriate discount rate is 15%.What is the present value of the payments?

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

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?