Question 1

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?

Accepted Answer

We can use the present value of an annuity formula to calculate the present value of the payments:
PV = $30,000 x [(1 - 1/(1+0.12)^6)/0.12]
PV = $123,342
Therefore, the equipment should be recorded at $123,342.

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

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 equipment...

Question 4

Demulza Company is considering an investment in equipment.The present value of cash inflows includes

Accepted Answer

The present value of cash inflows from an investment typically includes both the present value of annual net operating cash flows and the present value of the salvage value, as both contribute to the total cash inflows from the investment.

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?

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

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?

Accepted Answer

The note payable has a 5-year term with quarterly interest payments, resulting in 20 interest periods. The interest rate is 6% annually, but since it pays quarterly, the effective interest rate per quarter is 1.5%. Therefore, the choice that matches these criteria is C.

Question 7

Which can be computed using a financial calculator?

Accepted Answer

A financial calculator can be used to compute both the future value of a single sum and the future value of an annuity.

Question 8

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

To solve the problem, we need to calculate the present value of the series of $5,000 annual returns. Let X be the present value of the series of payments. Then we can write:

X = 5000/(1+0.10) + 5000/(1+0.10)^2 + ... + 5000/(1+0.10)^n

where n is the number of annual payments. This is a geometric series, and we can use the formula for its sum:

X = 5000[(1 - (1+0.10)^(-n))/0.10]

We know that X is equal to the initial investment of $35,516.80:

X = 35,516.80

Substituting this into the formula and solving for n, we get:

35,516.80 = 5000[(1 - (1+0.10)^(-n))/0.10]

7.10336 = (1 - (1+0.10)^(-n))/0.10

0.710336 = 1 - (1+0.10)^(-n)

(1+0.10)^(-n) = 0.289664

-n*log(1.10) = log(0.289664)

n = 12.966

Since we can only have whole number of payments, the answer is 13. Therefore, Peter will receive 13 annual payments of $5,000 each, starting one year from now.

Question 9

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?

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.

Quiz 14: Understanding Investments in Debt and Equity Securities