Question 1

When interest is earned on interest in a savings account in a bank, this is called compound interest.

Accepted Answer

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods, meaning interest is earned on interest.

Question 2

A dollar received today is worth more than a dollar received two years ago.

Accepted Answer

A dollar received two years ago is worth more than a dollar received today as it can be invested and will earn additional interest.

Question 3

If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60.

Accepted Answer

There are 20 quarterly periods in five years: 5 years × 4 times per year = 20 periods of compounding.

Question 4

Why is one dollar now worth more than one dollar in the future?
A) The amount to be received in the future is smaller than the amount to be paid off today
B) The value of interest declines over time
C) Funds can be invested in earning assets to yield a positive return
D) The time value of money depreciates over long periods of time

Accepted Answer

Investing money received today generates interest so that the investor will have more accumulated funds compared to waiting to receive funds in the future.

Question 5

If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested?
A) $2,472,000
B) $2,544,000
C) $2,546,160
D) $2,547,273

Accepted Answer

Amount at end of 6 months: $2,400,000 + ($2,400,000 × 6% × 6/12) = $2,472,000
Amount at end of 12 months: $2,472,000 + ($2,472,000 × 6% × 6/12) = $2,546,160

Question 6

Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years.
How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.)
A) $257,458
B) $1,783,167
C) $807,564
D) $1,086,877

Accepted Answer

Present value of $1,200,000 at n = 5 × 4 = 20, I = 8%/4 = 2%
PV = $1,200,000 × 0.67297 = $807,564
Financial calculator:
N = (5 x 4) = 20 I/Y = (8 / 4) = 2 PV = ? PMT = 0 FV = 1,200,000
PV = $807,565.60 (rounded)

Question 7

Mr. Chips, Inc. wishes to accumulate $2,000,000 to be used to pay off a loan at the end of 10 years.
How much will Mr. Chips deposit each year for 10 years (rounded to the nearest dollar), beginning at the end of the first year, to accumulate the desired amount if the investment earns an annual rate of 6%?
A) $151,736
B) $143,147
C) $259,215
D) $200,000

Accepted Answer

Future value of an annuity factor at n = 10, I = 6%
PMT = $2,000,000 / 13.18079 = $151,736 (rounded)
Financial calculator:
N = 10 I/Y = 6 PMT = ? PV = 0 FV = 2,000,000
PMT = 151,736

Question 8

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. 
How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $20,000,000...

Question 9

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. 
How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $20,000,000...

Question 10

Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. 
How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly?

Accepted Answer

The answer of Electric Motor Company wants to accumulate $16,000,000...

Question 11

Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. 
Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%?

Accepted Answer

The answer of Solar Co. needs to have $200 million...

Question 12

Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. 
How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly?

Accepted Answer

The answer of Solar Co. borrowed $5,000,000 to buy equipment...

Question 13

Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. 
How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly?

Accepted Answer

The answer of Solar Co. borrowed $300,000,000 to buy equipment...

Question 14

Why is one dollar now worth more than one dollar in the future?

Accepted Answer

The answer of Why is one dollar now worth more...

Question 15

An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year?

Accepted Answer

The answer of An investment of $1,600,000 will return $320,000...

Question 16

Compute the future value for each of the following amounts.
a. $200,000 invested today for 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually
b. $20,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually

Accepted Answer

The answer of Compute the future value for each of...

Quiz 15: Appendix: Accounting and the Time Value of Money

When interest is earned on interest in a savings account in a bank, this is called compound interest.

A dollar received today is worth more than a dollar received two years ago.

If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60.

Why is one dollar now worth more than one dollar in the future?

If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested?

Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.)

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually?

Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually?

Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly?

Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%?

Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly?

Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly?

Why is one dollar now worth more than one dollar in the future?

An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year?