Question 1

All of the following are necessary to compute the future value of a single amount except the

Accepted Answer

To compute the future value of a single amount, we need the principal amount, the interest rate, and the number of periods. The maturity value is the future value of the principal amount and is a result of computing the future value. Therefore, it is not necessary to compute the future value.

Question 2

The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in three years is

Accepted Answer

We can use the formula for compound interest:

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

Where:
A = Final amount (which is $10,000 in this case)
P = Principal amount (which we need to find)
r = Annual interest rate (which is 5%)
n = Number of times the interest is compounded per year (which is usually 12)
t = Time in years (which is 3 in this case)

Plugging in the values, we get:

10,000 = P(1 + 0.05/12)^(12*3)
10,000 = P(1.013)^36
P = 10,000 / (1.013)^36
P ≈ $8,638

Therefore, you need to deposit approximately $8,638 now in your savings account at 5% interest to accumulate $10,000 in three years. So the best choice is (C).

Question 3

Bill Cigarettes acquired a bad habit of smoking in high school.Bill spends approximately $70 a month or $840 a year on cigarettes.He is not concerned with health issues, but he is keenly aware of financial issues.Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking.

Accepted Answer

Use Table 2
$840 × 45.76196 (20 periods and 8%) = $38,440.05.

Question 4

Which table has a factor of 1.00000 for 1 period at every interest rate?

Accepted Answer

The answer of Which table has a factor of 1.00000...

Question 5

The present value of $10,000 to be received in five years will be smaller if the discount rate is

Accepted Answer

Increasing the discount rate increases the opportunity cost of waiting for the $10,000, making it less valuable in present terms. Therefore, the present value will be smaller.

Question 6

Robin Clark buys one avocado each week (4 per month) at an average cost of $2.50 per avocado.Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of buying avocados.

Accepted Answer

The answer of Robin Clark buys one avocado each week...

Question 7

Interest is the difference between the amount borrowed and the principal.

Accepted Answer

Interest is not the difference between the amount borrowed and the principal, it is the cost of borrowing and is calculated as a percentage of the principal. The total amount payable, which includes the principal and interest, is the amount borrowed plus the cost of borrowing.

Question 8

McGoff Company deposits $20,000 in a fund at the end of each year for five years.The fund pays interest of 4% compounded annually.The balance in the fund at the end of five years is computed by multiplying

Accepted Answer

The correct method to calculate the future value of a series of equal annual deposits (an annuity) is to multiply the annual deposit amount by the future value of an annuity factor, not just a single future value factor or a simple interest calculation. This takes into account the compound interest earned on each deposit over the period it is invested.

Question 9

Dexter Company is considering purchasing equipment.The equipment will produce the following cash flows:  Dexter requires a minimum rate of return of 10%.What is the maximum price Dexter should pay for this equipment?

Accepted Answer

The answer of Dexter Company is considering purchasing equipment.The equipment...

Question 10

Lamb Company deposited $15,000 annually for six years in an account paying 5% interest compounded annually.What is the balance of the account at the end of the 6th year?

Accepted Answer

The answer of Lamb Company deposited $15,000 annually for six...

Question 11

Compound interest is computed on the principal and any interest earned that has not been paid or received.

Accepted Answer

This is the definition of compound interest.

Question 12

The future value of an annuity factor for two periods is equal to

Accepted Answer

The answer of The future value of an annuity factor...

Question 13

If Sloane Joyner invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment?

Accepted Answer

The answer of If Sloane Joyner invests $10,514.81 now and...

Question 14

Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000.The deposits are made at the end of each year to a fund paying 5% interest compounded annually.What amount will be in the sinking fund at the end of the 10 years?

Accepted Answer

The answer of Martin Company issued $900,000, 10-year bonds and...

Question 15

The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.

Accepted Answer

This statement is true. The future value is calculated based on the present value and the interest rate over a given period of time.

Question 16

If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years?

Accepted Answer

To solve this problem, we need to use the formula for compound interest:

$A = P(1+r)^n$

where:
A = the final amount
P = the principal (initial amount)
r = the interest rate
n = the number of years

In this case, we have a principal of $30,000 deposited at the end of each year for 10 years, so our P is actually the sum of all deposits, which is:

$P = 30,000 + 30,000 + \dots + 30,000 = 300,000$

We also have an interest rate of 5%, which is expressed as a decimal:

$r = 0.05$

And we have a period of 10 years:

$n = 10$

Plugging these values into the formula, we get:

$A = 300,000(1+0.05)^{10} \approx 377,337$

Therefore, the balance of the account at the end of 10 years is $377,337. Answer choice C is the correct answer.

Question 17

Suzy Douglas has been offered the opportunity of investing $73,540 now.The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy.How many years must Suzy wait to receive the $200,000?

Accepted Answer

The calculation is based on the formula for the future value of a single sum, which is FV = PV(1 + i)^n, where FV is the future value, PV is the present value, i is the interest rate per period, and n is the number of periods. Rearranging the formula to solve for n gives n = log(FV/PV) / log(1+i). Plugging in the values from the question gives n = log(200,000/73,540) / log(1.08) ≈ 13.

Question 18

Compute the future value of $6,000 invested every year at an interest rate of 9%.You invest the money for 20 years with the first payment made at the end of the year.

Accepted Answer

The answer of Compute the future value of $6,000 invested...

Question 19

When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.

Accepted Answer

When the periodic payments vary, the future value cannot be directly computed using a future value of an annuity table, as these tables assume equal periodic payments. Instead, each payment must be individually calculated for its future value and then summed.

Question 20

Which of the following is not necessary to know in computing the future value of an annuity?

Accepted Answer

While the year the payments begin can affect the timing of when future payments are received, it is not necessary to know for computing the future value of an annuity. The amount of the periodic payments, interest rate, and number of compounding periods are the key factors in calculating the future value.

Quiz 14: Time Value of Money