Question 1

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?

Accepted Answer

Based on Table 6, the present value of a 10-year annuity due of $10 million is $75 million when the discount factor is 7.5000. Using the formula for calculating the interest rate for an annuity due, the interest rate is approximately 7.18%. Since this value falls between 7% and 8% in Table 6, the best choice is B) Between 7% and 8%.

Question 2

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year.
Required: Calculate the total present value of the cash savings.

Accepted Answer

The answer of DON Corp. is contemplating the purchase of...

Question 3

George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

Accepted Answer

George Jones wants to know how much he should set aside each month to accumulate $4,800 in five years. This is a future value of an annuity due problem.

An annuity due is a series of payments made at the beginning of each period. In this case, George is setting aside money at the beginning of each month.

Therefore, he should use the future value of an annuity due table to determine how much he should set aside each month at 6% interest to accumulate $4,800 in five years.

Question 4

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18 percent interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

Accepted Answer

Using the loan formula, we get:
Payment = (PVA of $1 for n=12, i=1.5%) x Loan amount 
Payment = (10.90751) x $20,000 
Payment = $218,150 
Monthly Payment = $218,150 / 12 
Monthly Payment = $1,834. Therefore, the best choice is (C).

Question 5

Suppose that Healdsburg renegotiates the 8% notes on December 31, 2014 when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2015, rather than pay the $225 million in a lump sum at maturity. What would the annual payments be?

Accepted Answer

The answer of Suppose that Healdsburg renegotiates the 8% notes...

Question 6

Compute the future value of the following invested amounts at the specified periods and interest rates.
 $\begin{array}{cccc}& \text { Invested } & \text { Interest } & \text { Number of } \
\text { Item } & \text { Amount } & \text { Rate } & \text { Periods }\
\text { a. } & \$ 20,000 & 8 \% & 10 \
\text { b. } & \$ 30,000 & 4 \% & 8 \
\text { c. } & \$ 10,000 & 12 \% & 15
\end{array}$

Accepted Answer

The answer of Compute the future value of the following...

Question 7

Quaker State Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?

Accepted Answer

The lump sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n=3 and i=10%. That is, $8,000 + ($20,000 x 2.48685 from Table 4) = $57,737. Therefore, the employee should choose the lump sum option if it is greater than or equal to $57,737, and the installment option if it is less than $57,737.

Question 8

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

Accepted Answer

The answer of Tammy wants to buy a car that...

Question 9

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

Accepted Answer

The answer of First Financial Auto Loan Department wishes to...

Question 10

The total cash interest payments in 2009 for these notes.

Accepted Answer

The answer of The total cash interest payments in 2009...

Question 11

Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Accepted Answer

The present value of an ordinary annuity of 1 is the most appropriate type of annuity table to use in this scenario because Sandra will receive the same amount of money at the end of each month for the next thirty years. The present value of an ordinary annuity of 1 takes into account the time value of money and provides the present value of a series of equal payments to be received at regular intervals in the future. This table will help Sandra determine the amount of her monthly check based on the interest rate and the length of the payout period.

Question 12

Suppose that Healdsburg wants to buy back the 7.75% notes on December 31, 2009 (i.e., 5 years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only)?

Accepted Answer

The answer of Suppose that Healdsburg wants to buy back...

Question 13

Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2009, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over the principal payment only on Healdsburg 's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

Accepted Answer

The answer of Suppose that Healdsburg enters into a sales...

Question 14

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.
 $\begin{array}{cccc}& \text { Invested } & \text { Interest } & \text { Number of } \
\text { Item } & \text { Amount } & \text { Rate } & \text { Periods }\
\text { a. } & \$ 40,000 & 7 \% & 20 \
\text { b. } & \$ 20,000 & 6 \% & 25 \
\text { c. } & \$ 50.000 & 11 \% & 10
\end{array}$

Accepted Answer

The answer of Compute the present value of the following...

Question 15

Garland Inc. offers a new employee a lump sum signing bonus at the date of employment, June 1, 2009. Alternatively, the employee can take $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2013. Assuming the employee's time value of money is 9% annually, what lump sum at employment date would make him indifferent between the two options?

Accepted Answer

The lump sum equivalent is calculated by adding the initial $39,000 to the present value of the deferred annuity ($10,000 for five years starting in 2013). The present value of this annuity is $42,397, which is then discounted back to the employment date to $30,035. Adding this to the initial $39,000 gives a total of $69,035.

Question 16

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make 6 equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

Accepted Answer

We can use the present value of an annuity due formula to compute the annual payments. The present value is $1 million, n=6, and i=6%. Using the discount factor from table 6, which is 5.21236, we can divide $1 million by this factor to get the annual payments of $191,852. Therefore, the best choice is D.

Question 17

Kunkle Company wishes to earn 20% annually on its investments. If it makes an investment that equals or exceeds that rate, it considers it a success. Assume that it invests $2 million and gets $500,000 in return at the end of each year fox X years. What is the minimum value of X for which it will consider the investment a success? Assume that it can't invest for fractional parts of a year.

Accepted Answer

The investment is considered successful when the present value of the ordinary annuity is at least $2 million. This occurs when the PV factor at 20% interest rate is at least 4.0, which happens in year 9 according to Table 4. Therefore, the minimum value of X for which the investment is considered a success is 9 years, making option D the correct answer.

Question 18

On January 1, 2009, Glanville Company sold goods to Otter Corporation. Otter signed a noninterest-bearing note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2009. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record the sales revenue in January 2009 of:

Accepted Answer

The sales revenue should be the present value of the six payments, which is $74,891. This is calculated by multiplying the annual payment of $15,000 by the present value annuity factor for six periods at 8%, which is 4.99271.

Question 19

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?

Accepted Answer

Using the future value of an annuity due formula, we can calculate that Fenland needs to invest $15,783,077 each year in order to have enough funds to retire $100 million in bonds after five years.

Question 20

Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year.
Required: Calculate the total present value of the cash flows.

Accepted Answer

The answer of Touche Manufacturing is considering a rearrangement of...

Quiz 6: Time Value of Money Concepts