Question 1

If €4,000 is put in a savings account today, what amount will be available six years from now?

Accepted Answer

The correct formula for future value with compound interest is: Future Value = Present Value × (1 + interest rate)^number of periods. Here, the factor 1.469 represents (1 + 0.08)^6, which is the correct factor for 6 years at 8% interest.

Question 2

If an individual put £4,000 in a savings account today, what amount of cash would be available two years from today?

Accepted Answer

The answer of If an individual put £4,000 in a...

Question 3

John Jones won a lottery that will pay him €2,000,000 after twenty years. Assuming an appropriate interest rate is 5% compounded annually, what is the present value of this amount?

Accepted Answer

To calculate the present value of the lottery winnings, we need to use the formula for present value of a future sum:
PV = FV / (1 + r) ^ n
PV = present value
FV = future value
r = interest rate
n = number of years

In this case, FV = €2,000,000, r = 5%, and n = 20. Substituting these values into the formula, we get:
PV = 2,000,000 / (1 + 0.05) ^ 20
PV = €753,780

Therefore, the correct answer is D.

Question 4

Angie invested £100,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually?

Accepted Answer

The interest rate is 10% per annum, compounded semi-annually. This means that Angie’s investment will earn 5% (10%/2) every six months. Therefore, after one year, her investment will grow to £100,000 × 1.05² = £110,250.
After 5 years, the investment will have grown to £100,000 × (1.05)^(2×5) = £162,889.46, which is closest to answer choice C (£162,890).

Question 5

If €3,000 is put in a savings account today, what amount will be available three years from today?

Accepted Answer

Assuming an average interest rate of 4% per year, we can calculate the future value of the savings account using compound interest formula:
FV = PV x (1 + r)^n
Where FV is the future value, PV is the present value, r is the interest rate per year, and n is the number of years.
In this case, PV = €3,000, r = 0.04, and n = 3.
Plugging these values into the formula, we get:
FV = €3,000 x (1 + 0.04)^3
FV = €3,000 x 1.12576
FV = €3,382.28
Therefore, the amount available three years from today is €3,382.28, which corresponds to choice B.

Question 6

Peter invests €100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?

Accepted Answer

The future value of one concept is used to calculate how much a single sum of money today will grow to at a future date given a specific interest rate, which is exactly what is needed to determine the maturity value of a certificate of deposit.

Question 7

What amount should be deposited in a bank today to grow to £3,000 three years from today?

Accepted Answer

The answer of What amount should be deposited in a...

Question 8

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of £23,000 payable on the first day of work or a signing bonus of £26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?

Accepted Answer

The answer of Jerry recently was offered a position with...

Question 9

If a savings account pays interest at 4% compounded quarterly, then the amount of €1 left on deposit for 6 years would be found in a table using

Accepted Answer

When interest is compounded quarterly, the annual interest rate is divided by 4, and the number of years is multiplied by 4. Therefore, for a 4% annual interest rate compounded quarterly over 6 years, it's 24 periods at 1%.

Question 10

Barkley Company will receive £300,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is £189,051. In how many years is the £300,000 received?

Accepted Answer

The answer of Barkley Company will receive £300,000 in a...

Question 11

What amount should be deposited in a bank account today to grow to €10,000 three years from today?

Accepted Answer

To calculate the present value (PV) required to grow to €10,000 in three years, we use the formula PV = FV / (1 + r)n, where FV is the future value, r is the interest rate, and n is the number of years. Since no interest rate is given, we must assume it is implicit in the answer choices. Choice A assumes an interest rate of 26% annually, which is not a reasonable assumption. Choice B multiplies the future value by the interest rate and the number of years, which is incorrect. Choice D divides the future value by an assumed interest rate of 8% annually, which is also not a reasonable assumption. Therefore, the only viable option is choice C, which divides the future value by 1.26 (1 + the assumed interest rate) to find the present value.

C: €10,000 ÷ 1.260

Question 12

Mordica Company will receive €200,000 in 7 years. If the appropriate interest rate is 10%, the present value of the €200,000 receipt is

Accepted Answer

We need to calculate the present value of €200,000 received in 7 years at an interest rate of 10%. Using the formula for present value of a single cash flow: 
PV = FV / (1 + r)^t 
where PV is the present value, FV is the future value, r is the interest rate, and t is the number of years. 
Plugging in the values, we get: 
PV = 200,000 / (1 + 0.10)^7 
PV = €102,632 
Therefore, the present value of the €200,000 receipt is €102,632. Option B is the correct answer.

Question 13

Milner Company will invest €400,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Accepted Answer

The amount of the investment after 5 years can be calculated using the formula:

A = P(1 + r/n)^(nt)

where:
P = €400,000 (the initial investment)
r = 6% (the interest rate)
n = 1 (since interest is compounded annually)
t = 5 (the number of years)

A = 400,000(1 + 0.06/1)^(1*5)
A = 400,000(1.338226)
A = €535,292

Therefore, the best choice is C, €535,292.

Question 14

What is the relationship between the future value of one and the present value of one?

Accepted Answer

The present value of one is calculated by dividing one by the future value of one, reflecting the concept that a dollar today is worth more than a dollar in the future due to the potential earning capacity. This relationship is fundamental in finance, illustrating how money's value decreases over time when considering its future earning potential.

Question 15

What is the present value today of £6,000 to be received six years from today?

Accepted Answer

The present value formula is: 
Present Value = Future Value / (1 + r)^n
Where:
r = discount rate
n = number of periods

In this case, the future value is £6,000, the number of periods is 6 years, and we need to find the discount rate.

Using a financial calculator or Excel, we can find that the discount rate is approximately 9.1%.
So, the present value is:
£6,000 / (1 + 0.091)^6 = £3,110.55

Therefore, the best answer is C, which is the closest to our calculated present value.

Question 16

At the end of two years, what will be the balance in a savings account paying 6% annually if €10,000 is deposited today? The future value of one at 6% for one period is 1.06.

Accepted Answer

To calculate the balance after two years, we need to multiply the initial deposit by the future value factor for two years at 6% interest.
Future value factor for two years at 6% interest= 1.06^2= 1.1236
So, the balance after two years= €10,000 x 1.1236= €11,236
Therefore, the correct answer is D.

Question 17

Altman Company will invest €500,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Accepted Answer

Using the compound interest formula,

FV = PV x (1+r)^n

where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years.

Plugging in the given values,

FV = €500,000 x (1+0.06)^5

FV = €669,115

Therefore, the amount in the investment fund after 5 years is €669,115.

Question 18

Dunston Company will receive £200,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is £102,632. In how many years is the £200,000 received?

Accepted Answer

The present value of a future receipt is calculated using the formula:PV = FV / (1 + r)^nwhere:PV is the present valueFV is the future valuer is the interest raten is the number of yearsIn this case, we have:PV = £102,632FV = £200,000r = 10%Substituting these values into the formula, we get:£102,632 = £200,000 / (1 + 0.1)^nSolving for n, we get:n = 7 yearsTherefore, the £200,000 is received in 7 years.

Question 19

Barber Company will receive €1,000,000 in 7 years. If the appropriate interest rate is 10%, the present value of the €1,000,000 receipt is

Accepted Answer

The present value of the €1,000,000 receipt can be calculated using the following formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years.

Plugging in the numbers, we get:
PV = €1,000,000 / (1 + 0.10)^7
PV = €1,000,000 / 1.948717
PV = €513,160.49

Therefore, the present value of the €1,000,000 receipt is €513,160. So, the best choice is B.

Question 20

Assume ABC Company deposits €50,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?

Accepted Answer

The correct answer is A because €50,000 * (1 + 0.06/2)^(2*5) = €67,196.

Quiz 6: Accounting and the Time Value of Money