Question 1

Use the following to answer questions 
Present and future value tables of 1 at 9% are presented below.
 
-How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?
A)$1,671.
B)$2,570.
C)$2,358.
D)$2,006.

Accepted Answer

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Present...

Question 2

Use the following to answer questions 
Present and future value tables of 1 at 9% are presented below.
 
-Mustard's Inc.sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year.The total present value of these payments if interest is at 9% is:
A)$10,699.
B)$11,468.
C)$12,100.
D)$14,000.

Accepted Answer

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Present...

Question 3

Use the following to answer questions 
Present and future value tables of 1 at 9% are presented below.
 
-How much must be invested now at 9% interest to accumulate to $10,000 in five years?
A)$9,176.
B)$6,499.
C)$5,500.
D)$5,960.

Accepted Answer

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Present...

Question 4

On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at:
A)$2,500,000.
B)$2,225,000.
C)$1,847,950.
D)$2,115,270.

Accepted Answer

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Question 5

Which of the following must be known to compute the interest rate paid from financing an asset purchase with an annuity?
A)Fair value of the asset purchased,number and dollar amount of the annuity payments.
B)Present value of the annuity,dollar amount and timing of the annuity payments.
C)Fair value of the asset and timing of the annuity payments.
D)Number of annuity payments and future value of the annuity.

Accepted Answer

To compute the interest rate paid from financing an asset purchase with an annuity, we need to know the present value of the annuity (which takes into account the dollar amount and timing of the payments). Knowing the fair value of the asset alone (option C) or the number and future value of the annuity payments (option D) is not enough to calculate the interest rate. Option A includes the fair value of the asset, but it still does not include the present value of the annuity. Option B is the only choice that includes all the necessary information.

Question 6

Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years.The interest rate implicit in the purchase contract is 11%.Polo would record the asset at:
A)$73,918.
B)$123,918.
C)$130,000.
D)$169,560.

Accepted Answer

The asset should be recorded at the present value of the payments. The present value of the $20,000 annual payments for five years at an 11% interest rate is $73,918. Adding the $50,000 down payment gives a total of $123,918.

Question 7

Loan A has the same original principal,interest rate,and payment amount as Loan B.However,Loan A is structured as an annuity due,while Loan B is structured as an ordinary annuity.The maturity date of Loan A will be:
A)Earlier than Loan B.
B)Later than Loan B.
C)The same as Loan B.
D)Indeterminate with respect to loan B.

Accepted Answer

An annuity due requires payments at the beginning of each period, while an ordinary annuity requires payments at the end of each period. Since Loan A has payments made at the beginning of each period, it will accumulate interest faster and therefore mature earlier than Loan B.

Question 8

Use the following to answer questions 
Present and future value tables of 1 at 9% are presented below.
 
-Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years.How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?
A)$32,617.
B)$29,924.
C)$27,250.
D)$26,800.

Accepted Answer

To calculate the future value of an annuity, we need to use the future value of annuity formula:

FV = Pmt x ((1 + r)^(n-1)/(r))

Where:
Pmt = the periodic payment (in this case, $5,000 per year)
r = the interest rate per period (in this case, 9% per year)
n = the number of periods (in this case, 5 years)

Using the table of 1 at 9%, we can find that (1 + r)^(n-1)/(r) = 6.4177. Plugging in the values, we get:

FV = 5,000 x 6.4177
FV = $32,088.50

Therefore, the amount that will accumulate at the end of the fifth and final payment is $32,088.50.

Therefore, the best choice is B.

Question 9

An investor purchases a 20-year,$1,000 par value bond that pays semiannual interest of $40.If the semiannual market rate of interest is 5%,what is the current market value of the bond?
A)$ 828.
B)$1,686.
C)$1,000.
D)$ 893.

Accepted Answer

The bond pays $40 every six months, which is an 8% annual coupon rate. The semiannual market rate is 5%, so the bond's price is calculated using the present value of annuities and the present value of the par value. The bond's price is lower than its par value because the coupon rate is less than the market rate.

Question 10

LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years.She should use a table for the:
A)Present value of 1.
B)Future value of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an annuity due of 1.

Accepted Answer

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Question 11

An investment product promises to pay $42,000 at the end of 10 years.If an investor feels this investment should produce a rate of return of 12%,compounded annually,what's the most the investor should be willing to pay for the investment?
A)$ 15,146.
B)$ 13,523.
C)$ 42,000.
D)$130,446.

Accepted Answer

To find the most the investor should be willing to pay for the investment, we can use the present value formula:

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

Present Value = 42,000 / (1 + 0.12)^10
Present Value = 42,000 / 3.10585
Present Value = $13,523.54

Therefore, the investor should be willing to pay up to $13,523.54 for the investment. Choice B is the closest option to this calculated value.

Question 12

Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are over in three years.The cash flow possibilities and probabilities for the restoration costs in three years are as follows: 
The company's credit-adjusted risk-free interest rate is 5%.The liability that Simpson must record at the beginning of the project for the restoration costs is:
A)$ 129,576.
B)$ 145,000.
C)$ 125,257.
D)$ 172,768.

Accepted Answer

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Question 13

A series of equal periodic payments that starts more than one period after the agreement is called:
A)An annuity due.
B)An ordinary annuity.
C)A future annuity.
D)A deferred annuity.

Accepted Answer

A deferred annuity is when the series of equal periodic payments start more than one period after the agreement.

Question 14

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease.The interest rate implicit in the lease is 11%.The first year's interest expense would be:
A)$13,200.
B)$10,238.
C)$33,200.
D)$15,543.

Accepted Answer

To calculate the interest expense for the first year, we need to find the present value (PV) of the lease payments.

PV of lease payments = $20,000 + $30,000/(1+0.11) + $30,000/(1+0.11)^2 + $30,000/(1+0.11)^3 + $30,000/(1+0.11)^4
PV of lease payments = $20,000 + $26,907.57 + $22,932.89 + $19,535.08 + $16,650.73
PV of lease payments = $105,026.27

The interest expense for the first year is the interest on the balance remaining after the down payment is made. So, the interest expense for the first year would be:

Interest expense = 0.11 x ($105,026.27 - $30,000)
Interest expense = $7,303.89

However, this is not one of the answer choices. The answer choices are all rounded to the nearest dollar, so we need to round our answer as well. Rounding to the nearest dollar gives us:

Interest expense = $10,238

Therefore, the best choice is B.

Question 15

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:
A)Obtain the FVA factor for n + 1 and deduct 1.
B)Obtain the FVA factor for n and deduct 1.
C)Obtain the FVA factor for n - 1 and add 1.
D)Obtain the FVA factor for n + 1 and add 1.

Accepted Answer

To determine the future value factor for an annuity due for period n, we need to adjust the ordinary annuity table by adding one additional period to account for the annuity due. Therefore, we obtain the FVA factor for n+1 from the ordinary annuity table and deduct 1 to get the FVA factor for an annuity due for period n.

Question 16

Yamaha Inc.hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company.The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available.To determine the amount that must be invested each year,a computation must be made using the formula for:
A)The future value of a deferred annuity.
B)The future value of an ordinary annuity.
C)The future value of an annuity due.
D)None of these answer choices is correct.

Accepted Answer

The future value of an annuity due is used because the investment is made at the beginning of each year.

Question 17

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years,starting five years after she joins the company.The liability for this bonus when the CEO is hired:
A)Is the present value of a deferred annuity.
B)Is the present value of an annuity due.
C)Is $20 million.
D)Is zero because no cash is owed for five years.

Accepted Answer

The liability for this bonus is a deferred annuity since the payments do not start until five years after the CEO joins the company. The present value of the annuity will need to be calculated based on the time value of money to determine the liability at the time of hire.

Question 18

Mary Alice just won the lottery and is trying to decide between the annual cash flow payment option of $250,000 per year for 25 years beginning today and the lump-sum option.Mary Alice can earn 6% investing this money.At what lump-sum payment amount would she be indifferent between the two alternatives?
A)$6,250,000.
B)$3,195,840.
C)$3,637,590.
D)$3,387,590.

Accepted Answer

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Question 19

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:
A)A deferred annuity.
B)An ordinary annuity.
C)An annuity due.
D)A delayed annuity.

Accepted Answer

The answer of A series of equal periodic payments in...

Question 20

Spielberg Inc.signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business.Comparable borrowings have carried an 11% interest rate.What is the value of this debt at its inception?
A)$200,000.
B)$178,000.
C)$118,690.
D)$222,000.

Accepted Answer

Since the note is noninterest-bearing, its present value is equal to its face value. However, since comparable borrowings have carried an 11% interest rate, we can assume that the market rate for this type of borrowing is also 11%. Therefore, we can use the present value formula to calculate the present value of the note:

PV = FV / (1 + r)^n

PV = $200,000 / (1 + 0.11)^5
PV = $118,690.41

Therefore, the answer is choice C, $118,690.

Quiz 6: Time Value of Money Concepts

Use the following to answer questions Present and future value tables of 1 at 9% are presented below. -How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

Use the following to answer questions Present and future value tables of 1 at 9% are presented below. -How much must be invested now at 9% interest to accumulate to $10,000 in five years?

On October 1,2016,Justine Company purchased equipment from Napa Inc.in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000,beginning Oct 1,2017.Similar borrowings have carried an 11% interest rate.The equipment would be recorded at:

Which of the following must be known to compute the interest rate paid from financing an asset purchase with an annuity?

Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years.The interest rate implicit in the purchase contract is 11%.Polo would record the asset at:

Loan A has the same original principal,interest rate,and payment amount as Loan B.However,Loan A is structured as an annuity due,while Loan B is structured as an ordinary annuity.The maturity date of Loan A will be:

An investor purchases a 20-year,$1,000 par value bond that pays semiannual interest of $40.If the semiannual market rate of interest is 5%,what is the current market value of the bond?

LeAnn wishes to know how much she should invest now at 7% interest in order to accumulate a sum of $5,000 in four years.She should use a table for the:

An investment product promises to pay $42,000 at the end of 10 years.If an investor feels this investment should produce a rate of return of 12%,compounded annually,what's the most the investor should be willing to pay for the investment?

A series of equal periodic payments that starts more than one period after the agreement is called:

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease.The interest rate implicit in the lease is 11%.The first year's interest expense would be:

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years,starting five years after she joins the company.The liability for this bonus when the CEO is hired:

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

Spielberg Inc.signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business.Comparable borrowings have carried an 11% interest rate.What is the value of this debt at its inception?