Question 1

A deferred annuity is an annuity in which interest is not compounded until a future period.

Accepted Answer

The answer of A deferred annuity is an annuity in...

Question 2

Which of the following must be known to compute the interest rate paid from financing an asset purchase with an 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 payments, as well as the dollar amount and number of the annuity payments. The fair value of the asset purchased and the future value of the annuity are not required for this calculation.

Question 3

Which of the following transactions would best use the present value of an annuity due of 1 table?

Accepted Answer

The present value of an annuity due of 1 table is used to determine the present value of a series of cash flows made at the beginning of each period. Option A, where Bengatti leases a truck with annual payments to be made at the beginning of each year, is the best choice for using the present value of an annuity due of 1 table.

Question 4

You are provided with two time-value-of-money tables.One table provides factors for the present value of an ordinary annuity and the other provides factors for the present value of an annuity due.How can you tell which table is which type?

Accepted Answer

The answer of You are provided with two time-value-of-money tables.One...

Question 5

For any discount rate and number of periods,the present value of an annuity due factor is always greater than the corresponding the present value of an ordinary annuity factor.

Accepted Answer

An annuity due is a series of equal payments made at the beginning of each period, while an ordinary annuity is a series of equal payments made at the end of each period. Since payments made at the beginning of each period have an extra period of earning interest compared to payments made at the end of each period, the present value of an annuity due factor will always be greater than the corresponding present value of an ordinary annuity factor for any given discount rate and number of periods.

Question 6

In the present value of an annuity table,the factors ________.

Accepted Answer

As the interest rates increase, the present value of future payments decreases because the time value of money decreases. Similarly, as the periods increase, the present value of future payments increases because the time value of money increases. Therefore, the factors in the present value of an annuity table would decrease as the interest rates increase.

Question 7

Each year for the next 10 years,Carmen Lector will deposit $4,000 into an investment fund that pays 8% compounded annually.
a.What is the present value of those investment payments if the first of 40 deposits are made at the end of each year?
b.What is the present value of those investment payments if the first of 40 deposits are made at the beginning of each year?

Accepted Answer

The answer of Each year for the next 10 years,Carmen...

Question 8

Terry Brown purchases a used car and agreed to pay $200 per month for two-and-a-half years with the first payment due at the end of the first month.What was the purchase price of the car assuming an annual rate of 12%?

Accepted Answer

The answer of Terry Brown purchases a used car and...

Question 9

On January 1,Yumati Electric borrows $333,333 at an interest rate of 6% today and will repay this amount by making 16 semiannual payments beginning May 31.What is the approximate amount of the payments that Yumati will need to make?

Accepted Answer

The answer of On January 1,Yumati Electric borrows $333,333 at...

Question 10

The factor for the present value of an ordinary annuity for 10% and eight periods is less than ________.

Accepted Answer

The present value factor for an ordinary annuity decreases as the interest rate increases, so the factor for 10% will be less than the factor for 8%. The other options are not necessarily true, as changing the interest rate or number of periods will affect the factor differently.

Question 11

You have just won the Multi-State Lottery Jackpot of $500,000,000! You have the option of receiving a check for $25,000,000 every year at the end of the next 20 years.The lottery commission also allows you the option of receiving a one-time payment of $311,555,000 when you turn in the winning ticket.What is the approximate interest rate that the lottery commission is using to determine the one-time payment?

Accepted Answer

The answer of You have just won the Multi-State Lottery...

Question 12

Potash Corporation financed the purchase of a building by making semiannual payments of $20,000 a year for the next twenty years,with the first payment due one year from today.The purchase cost of the building is considered to be the present value of those payments.What was the purchase cost of the building to Potash assuming an annual interest rate of 10%?

Accepted Answer

This question requires calculating the present value of an annuity. We can use the formula:

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

Where:
PV = present value 
A = the annual payment 
r = the interest rate per period (semiannual in this case). Since the annual interest rate is 10%, the semiannual rate is 5%. 
n = the number of periods (in this case, 20 years * 2 semiannual payments per year = 40 periods)

Plugging in the values: 
PV = 20,000 * [1 - (1+0.05)^(-40)] / 0.05 
PV = $343,182

Therefore, the purchase cost of the building to Potash is $343,182 (option B).

Question 13

A deferred annuity is an annuity for which payments are delayed until the end of each period.

Accepted Answer

The answer of A deferred annuity is an annuity for...

Question 14

The present value of a four-year ordinary annuity for which the first payment is deferred for five years (not received until year six)is equal to the present value of a nine-year ordinary annuity minus the present value of a five-year ordinary annuity.

Accepted Answer

The answer of The present value of a four-year ordinary...

Question 15

Jenks Company financed the purchase of a machine by paying $24,000 a year for the next five years,with the first payment due one year from today.The purchase cost of the machine is considered to be the present value of those payments.What was the purchase cost of the machine to Jenks assuming a discount rate of 8%?

Accepted Answer

The purchase cost of the machine is the present value of an annuity. Using the formula for the present value of an annuity, PV = PMT × [(1 - (1 + r)^-n) / r], where PMT = $24,000, r = 0.08, and n = 5, the calculation gives approximately $95,825.

Question 16

A deferred annuity is an annuity for which the first payment is delayed until a future period.

Accepted Answer

A deferred annuity is designed to have the first payment start at a time in the future, rather than immediately. This delay can provide additional time for the annuity to grow before distributions begin.

Question 17

Assume that you have the opportunity to receive $5,000 at the end of each of the next five years.Given an interest rate of 6%,how much would you be willing to pay for this investment today?

Accepted Answer

We can use the formula for Present Value of an Annuity to calculate the amount we are willing to pay today.

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

where PV is the present value, C is the amount received each year, r is the interest rate, and n is the number of periods.

Plugging in the values, we get:

PV = 5000 * [(1 - (1 + 0.06)^-5) / 0.06]
PV = $21,062.

Therefore, we are willing to pay $21,062 today to receive $5,000 at the end of each of the next five years, given an interest rate of 6%.

Thus, the best choice is B.

Question 18

Each quarter for the next 10 years,Carmen Lector will deposit $1,000 into an investment fund that pays 8% compounded quarterly.
a.What is the present value of those investment payments if the first of 40 deposits are made at the end of each quarter?
b.What is the present value of those investment payments if the first of 40 deposits are made at the beginning of each quarter?

Accepted Answer

The answer of Each quarter for the next 10 years,Carmen...

Question 19

Bangin Inc.financed the purchase of a machine by making ten annual payments of $13,000 with the first payment due today.The purchase cost of the machine is considered to be the present value of those payments.What was the purchase cost of the machine to Bangin assuming a discount rate of 9%?

Accepted Answer

The answer of Bangin Inc.financed the purchase of a machine...

Question 20

When the present value of an annuity is calculated as of two or more periods before the payment of the first cash flow,the annuity is ________.

Accepted Answer

When the present value of an annuity is calculated as of two or more periods before the payment of the first cash flow, it is referred to as a deferred annuity. This is because the payments are deferred or postponed until a later date. The other options do not accurately describe this scenario. An ordinary annuity has payments that begin at the end of the period, whereas an annuity due has payments that begin at the beginning of the period. A future annuity is not a commonly used term in finance.

Quiz 7: Accounting and the Time Value of Money