Question 1

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:
A) Present value of $1.
B) Present value of an ordinary annuity of $1.
C) Present value of an annuity due of $1.
D) Future value of an annuity due of $1.

Accepted Answer

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Question 2

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following:

Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:
-Suppose that Healdsburg wants to pay off the 7.75% notes on December 31, 2018, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only) on this date in order to satisfy the noteholders?

Accepted Answer

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Question 3

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following:

Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:
-The total cash interest payments in 2018 for these notes.

Accepted Answer

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Question 4

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?
A) $1,667.
B) $1,511.
C) $1,834.
D) None of these answer choices are correct.

Accepted Answer

$20,000 ÷ 10.90751* = $1,834 (rounded)
*PVA of $1: n = 12; i = 1.5%

Question 5

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:
A) Present value of an annuity due of $1.
B) Future value of an annuity due of $1.
C) Present value of an ordinary annuity of $1.
D) Future value of an ordinary annuity of $1.

Accepted Answer

Sandra will be receiving a fixed amount every month for the next 30 years, making this an ordinary annuity. To determine the amount of her monthly check, she needs to calculate the present value of the annuity. Therefore, she should use a table for the Present value of an ordinary annuity of $1. Choice C is the only option that fits this criteria, making it the best choice.

Question 6

Kunkle Company wishes to earn 20% annually on its investments. If Kunkle makes an investment that equals or exceeds that rate, it considers it a success. Assume that Kunkle invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X (number of years) for which Kunkle will consider the investment a success? Assume that Kunkle can't invest for fractional parts of a year.
A) 4 years.
B) 6 years.
C) 7 years.
D) 9 years.

Accepted Answer

The investment is successful when the present value of the ordinary annuity at 20% will be $2 million. This is when the PV factor (from Table 4) is at least 4.0, so that when the PV factor is multiplied by the $500,000 annual amount received, the result is at least $2 million. In Table 4, at i = 20%, the factor passes the 4.0 level in year 9.

Question 7

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.
A) $166,651.
B) $135,252.
C) $203,351.
D) $191,852.

Accepted Answer

We compute the annual payments in the present value of an annuity due formula, where the present value is $1 million, n = 6 and i = 6%. The present value factor (from table 6) is 5.21236. Dividing $1 million by this factor gives payments of $191,852.

Question 8

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: A) Future value of an ordinary annuity of $1. B) Future value of an annuity due of $1. C) Future value of $1. D) Present value of an annuity due of $1.

Accepted Answer

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Question 9

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to fund a savings account at the beginning of each year during that period for which it expects to earn 8% annually. At the end of the five years, there will be enough money in the account to pay off the bonds. What amount does Fenland need to invest each year?
A) $15,783,077.
B) $17,045,650.
C) $23,190,400.
D) Cannot be determined from the given information.

Accepted Answer

This is the amount in the future value of an annuity due formula, where $100 million = investment amount × factor from Table 5 where n = 5 and i = 8%. Thus, Investment amount = $100 million ÷ 6.3359 = $15,783,077.

Question 10

On January 1, 2018, Glanville Company sold goods to Otter Corporation. Otter signed an installment note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2018. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2018 of:
A) $90,000.
B) $69,343.
C) $74,891.
D) None of these answer choices are correct.

Accepted Answer

$15,000 × 4.99271* = $74,891 (rounded)
*PVAD of $1: n = 6; i = 8%

Question 11

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following:

Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:
-Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2018, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over only the principal payment on Healdsburg's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

Accepted Answer

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Question 12

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. in exchange for a building that now has a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?
A) Between 13% and 14%.
B) Between 7% and 8%.
C) Between 5.5% and 6%.
D) Cannot be determined from the given information.

Accepted Answer

The interest rate is the rate that will provide a present value of $75 million when finding the amount of the annuity. That is, the present value of a 10-year annuity due of $10 million is $75 million, when the present value factor (from Table 6) equals 7.5000. That point is between 7% and 8% in the table.

Question 13

Compute the future value of the following invested amounts at the specified periods and interest rates.

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Question 14

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following:

Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date.

Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following:
-Suppose that Healdsburg renegotiates the 8% notes on December 31, 2023, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2024, rather than pay the annual interest payments and the $225 million in a single amount at maturity. What would the annual payments be?

Accepted Answer

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Question 15

Davenport Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what single sum at the employment date would make her indifferent between the two options? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
A) $60,000.
B) $62,867.
C) $72,867.
D) $80,000.

Accepted Answer

The single-sum equivalent would be $30,000 + the present value of $50,000 where n = 2 and i = 8%. That is, $30,000 + ($50,000 × 0.85734 from Table 2) = $72,867.

Question 16

Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is:
A) Higher than Loan D.
B) Less than Loan D.
C) The same as Loan D.
D) Indeterminate compared to Loan D.

Accepted Answer

The interest rate for Loan C will be higher than Loan D because Loan C is structured as an annuity due, which means that the first payment is due immediately. This means that the lender has access to the funds earlier, making it less risky, and thus allowing for a lower interest rate for Loan D, which has a payment due at the end of the period. Therefore, the interest rate for Loan C will be higher to compensate for the earlier payment.

Question 17

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

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Question 18

Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?
A) $23,026.
B) $57,737.
C) $62,711.
D) None of these answer choices are correct.

Accepted Answer

The single-sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n = 3 and i = 10%. That is, $8,000 + ($20,000 × 2.48685 from Table 4) = $57,737.

Question 19

Garland Inc. offers a new employee a single-sum signing bonus at the date of employment, June 1, 2018. Alternatively, the employee can receive $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2022. Assuming the employee's time value of money is 9% annually, what single amount at the employment date would make the options equally desirable?
A) $44,035.
B) $40,855.
C) $69,035.
D) $65,855.

Accepted Answer

The single-sum equivalent would be $39,000 + the present value of a $10,000 deferred annuity. The present value of the deferred annuity on June 1, 2022, is an annuity due with n = 5 and i = 9%. That is, ($10,000 × 4.23972 from Table 6) = $42,397. To compute the equivalent of that amount at employment date, we take the present value of $42,397 where n = 4 and i = 9% from Table 2, which is $42,397 × 0.70843 = $30,035. Therefore, the single-sum equivalent would be $39,000 + $30,035 = $69,035.

Question 20

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:
A) Multiply $10,500 by the present value of $1.
B) Divide $10,500 by the future value of an ordinary annuity of $1.
C) Divide $10,500 by the present value of an annuity due of $1.
D) Multiply $10,500 by the present value of an ordinary annuity of $1.

Accepted Answer

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Quiz 6: Time Value of Money Concepts

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. in exchange for a building that now has a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?

Compute the future value of the following invested amounts at the specified periods and interest rates.

Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is:

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: