Question 1

If the single amount of $2000 is to be received in 2 years and discounted at 11% its present value is
A) $1818.
B) $1623.
C) $1802.
D) $2754.

Accepted Answer

The present value (PV) of a future amount can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. Here, FV = $2000, r = 11% or 0.11, and n = 2 years. Plugging these values into the formula gives PV = $2000 / (1 + 0.11)^2 = $2000 / (1.11)^2 = $2000 / 1.2321 = $1623 (rounded to the nearest dollar).

Question 2

If the single amount of $3000 is to be received in 3 years and discounted at 6% its present value is
A) $2519.
B) $2830.
C) $2600.
D) $2820.

Accepted Answer

We can use the formula for present value of a single amount:

PV = FV / (1 + r)^n

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

In this case, FV = $3000, r = 6%, and n = 3. Plugging these values into the formula, we get:

PV = 3000 / (1 + 0.06)^3
PV = 3000 / 1.191016
PV = $2519.17 (rounded to the nearest cent)

Therefore, the best choice is A, with a present value of $2519.

Question 3

If you are able to earn a 15% rate of return what amount would you need to invest to have $15000 one year from now?
A) $14852
B) $13125
C) $12750
D) $13044

Accepted Answer

Using the formula for compound interest we have:
$15000 = P(1+0.15)
Solving for P:
P = $13043.48
Therefore the closest answer is D, which is $13044.

Question 4

The present value of $10000 to be received in 5 years will be smaller if the discount rate is
A) increased.
B) decreased.
C) not changed.
D) equal to the stated rate of interest.

Accepted Answer

The present value of a future cash flow decreases as the discount rate increases. This is because a higher discount rate reflects a higher opportunity cost of waiting for the cash flow, making it worth less in today's dollars. Therefore, if the discount rate is increased, the present value of $10000 to be received in 5 years will be smaller.

Question 5

Suzy Douglas has been offered the opportunity of investing $73540 now. The investment will earn 8% per year and at the end of its life will return $200000 to Suzy. How many years must Suzy wait to receive the $200000?
A) 10
B) 11
C) 12
D) 13

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

The amount you must deposit now in your savings account paying 5% interest in order to accumulate $10000 for your first tuition payment when you start college in 3 years is
A) $8500.
B) $7830.
C) $8638.
D) $8860.

Accepted Answer

To find the present value (amount to deposit now), use the formula: Present Value = Future Value / (1 + interest rate)^number of years. Here, $10,000 / (1 + 0.05)^3 = $10,000 / 1.157625 = $8638.

Question 7

Hazel Company has just purchased equipment that requires annual payments of $40000 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?
A) $114199
B) $160000
C) $46975
D) $150135

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.

Question 8

In order to compute the present value of an annuity it is necessary to know the
1) discount rate.
2) number of discount periods and the amount of the periodic payments or receipts.
A) 1
B) 2
C) both 1 and 2
D) something in addition to 1 and 2

Accepted Answer

The present value of an annuity formula requires both the discount rate (1) and the number of discount periods and the amount of the periodic payments or receipts (2). Therefore, both options 1 and 2 are necessary to compute the present value of an annuity.

Question 9

Perdue Company has purchased equipment that requires annual payments of $30000 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?
A) $180000
B) $123342
C) $165772
D) $115650

Accepted Answer

To find the present value of the annual payments, we can use the formula:

PV = Payment*[1 - (1+r)^-n]/r

where:
Payment = $30,000
r = 12%
n = 6

Plugging in the values, we get:

PV = $30,000*[1 - (1+0.12)^-6]/0.12 = $123,342

Therefore, the amount used to record the equipment would be $123,342, which is option B.

Question 10

Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: $$\begin{array} { l l } 
\text { Year 1 } & \$ 120,000 \
\text { Year 2 } & \$ 200,000
\end{array}$$ Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment?
A) $274381
B) $165290
C) $320000
D) $160000

Accepted Answer

To find the maximum price Dexter should pay for the equipment, we calculate the present value of the cash flows at the required rate of return of 10%. The present value (PV) formula is: $$PV = \frac{CF_1}{(1+r)^1} + \frac{CF_2}{(1+r)^2}$$ where $CF_1$ and $CF_2$ are the cash flows in Year 1 and Year 2, respectively, and $r$ is the rate of return.Substituting the given values:$$PV = \frac{120,000}{(1+0.10)^1} + \frac{200,000}{(1+0.10)^2}$$$$PV = \frac{120,000}{1.10} + \frac{200,000}{1.21}$$$$PV = 109,090.91 + 165,289.26$$$$PV = 274,380.17$$Rounded to the nearest dollar, the maximum price Dexter should pay for the equipment is $274,381.

Question 11

Present value is based on
A) the dollar amount to be received.
B) the length of time until the amount is received.
C) the interest rate.
D) All of these answers are correct.

Accepted Answer

Present value takes into account the dollar amount to be received, the length of time until the amount is received, and the interest rate. All three factors affect the present value of future cash flows.

Question 12

Which of the following discount rates will produce the smallest present value?
A) 8%
B) 9%
C) 10%
D) 4%

Accepted Answer

A higher discount rate reduces the present value of future cash flows more than a lower discount rate. Therefore, among the given options, 10% will produce the smallest present value.

Question 13

Peter Johnson invests $35516.80 now for a series of $5000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive?
A) 10
B) 12
C) 13
D) 15

Accepted Answer

Using the formula for the present value of an annuity due:

PV = C * [(1 - (1 + r/n)^(-nt))/ (r/n)] * (1 + r/n)

where PV is the present value, C is the periodic payment, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years.

We have PV = $35,516.80, C = $5,000, r = 10%, and n = 1 (annual payments). Solving for t, we get:

$35,516.80 = $5,000 * [(1 - (1 + 0.10/1)^(-t*1))/ (0.10/1)] * (1 + 0.10/1)

$35,516.80 = $5,000 * [(1 - 1/(1.1)^t)/ 0.10] * 1.1

$35,516.80 = $55,000 * (1 - 1/(1.1)^t)

(1 - 1/(1.1)^t) = $35,516.80 / $55,000

(1.1)^t - 1 = 0.6458

Using logarithms, we get:

t = log(1 + 0.6458)/log(1.1) = 13.03

Therefore, Peter will receive 13 annual payments. The closest answer choice is C (13).

Question 14

A $10000 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?
A) 5 interest periods 6% interest
B) 20 interest periods 6% interest
C) 20 interest periods 1.5% interest
D) 5 interest periods 1.5% interest

Accepted Answer

We need to find the present value of a $10000 6% 5-year note payable that pays interest quarterly. Therefore, we need to use tables that show the periodic interest for quarterly payments. That is, we need the interest rate per quarter. The formula to calculate this interest rate is:

(1 + periodic interest rate)^number of periods = 1 + annual interest rate
(1 + i)^4 = 1 + 0.06
(1 + i) = (1 + 0.06)^(1/4)
(1 + i) = 1.01477
i = 0.01477 or 1.477%

Therefore, we need to use tables that indicate 20 interest periods (5 years * 4 quarters per year) at a periodic interest rate of 1.5% (half of the quarterly interest rate we just calculated). Choice C is the only option that meets these criteria.

Question 15

If you are able to earn an 8% rate of return what amount would you need to invest to have $30000 one year from now?
A) $27747
B) $27778
C) $27273
D) $29700

Accepted Answer

The answer of If you are able to earn an...

Question 16

Suppose you have a winning lottery ticket and you are given the option of accepting $3000000 three years from now or taking the present value of the $3000000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now the amount you will receive is
A) $2518860.
B) $2591520.
C) $2670000.
D) $3000000.

Accepted Answer

The present value (PV) of the future amount can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($3,000,000), r is the discount rate (6% or 0.06), and n is the number of years (3). Plugging in the values, PV = $3,000,000 / (1 + 0.06)^3 = $2,518,860.

Question 17

If Sloane Joyner invests $10514.81 now and she will receive $30000 at the end of 11 years what annual rate of interest will she be earning on her investment?
A) 8%
B) 8.5%
C) 9%
D) 10%

Accepted Answer

The answer of If Sloane Joyner invests $10514.81 now and...

Question 18

In present value calculations the process of determining the present value is called
A) allocating.
B) pricing.
C) negotiating.
D) discounting.

Accepted Answer

Present value calculations involve discounting future cash flows to their present value using a discount rate. Therefore, the process of determining the present value is called discounting. Choices A, B, and C are not accurate descriptions of this process.

Question 19

The amount you must deposit now in your savings account paying 6% interest in order to accumulate $6000 for a down payment 5 years from now on a new car is
A) $1200.
B) $4484.
C) $4477.
D) $4200.

Accepted Answer

To find the present value (the amount you must deposit now) to accumulate a future sum, you use the formula for the present value of a single sum: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($6000), r is the interest rate per period (6% or 0.06), and n is the number of periods (5 years). Plugging in the values: PV = $6000 / (1 + 0.06)^5 ≈ $4484.

Question 20

Which of the following accounting problems does not involve a present value calculation?
A) The determination of the market price of a bond.
B) The determination of the declining-balance depreciation expense.
C) The determination of the amount to report for long-term notes payable.
D) The determination of the amount to report for lease liability.

Accepted Answer

The determination of the declining-balance depreciation expense does not involve a present value calculation. It is a method of calculating depreciation expense based on a fixed percentage of the asset's book value. The other options involve calculating present values either for bond pricing, notes payable or lease liabilities.

Quiz 27: Time Value of Money

If the single amount of $2000 is to be received in 2 years and discounted at 11% its present value is

If the single amount of $3000 is to be received in 3 years and discounted at 6% its present value is

If you are able to earn a 15% rate of return what amount would you need to invest to have $15000 one year from now?

The present value of $10000 to be received in 5 years will be smaller if the discount rate is

Suzy Douglas has been offered the opportunity of investing $73540 now. The investment will earn 8% per year and at the end of its life will return $200000 to Suzy. How many years must Suzy wait to receive the $200000?

The amount you must deposit now in your savings account paying 5% interest in order to accumulate $10000 for your first tuition payment when you start college in 3 years is

Hazel Company has just purchased equipment that requires annual payments of $40000 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?

In order to compute the present value of an annuity it is necessary to know the 1) discount rate. 2) number of discount periods and the amount of the periodic payments or receipts.

Perdue Company has purchased equipment that requires annual payments of $30000 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?

Present value is based on

Which of the following discount rates will produce the smallest present value?

Peter Johnson invests $35516.80 now for a series of $5000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive?

A $10000 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?

If you are able to earn an 8% rate of return what amount would you need to invest to have $30000 one year from now?

If Sloane Joyner invests $10514.81 now and she will receive $30000 at the end of 11 years what annual rate of interest will she be earning on her investment?

In present value calculations the process of determining the present value is called

The amount you must deposit now in your savings account paying 6% interest in order to accumulate $6000 for a down payment 5 years from now on a new car is

Which of the following accounting problems does not involve a present value calculation?