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Exam 6: Time Value of Money Concepts

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Question 61

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Prepare a time diagram for the future value of an ordinary annuity with three payments of $300. Be sure to indicate the periods in which interest is added.

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TIME DIAGRAM FOR THE FUTURE VALUE OF AN ...

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Question 62

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

A) Between 13% and 14%.
B) Between 7% and 8%.
C) Between 5.5% and 6%.
D) Cannot be determined from the given information.

E) A) and B)
F) B) and C)

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Question 63

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Briefly describe the differences between an ordinary annuity, an annuity due, and a deferred annuity.

Each of the independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor's implicit interest rate. Required: For each situation determine the amount of the annual lease payment, as calculated by the lessor.

In the future value of an ordinary annuity, the last cash payment will not earn any interest.

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

Two banks each have annual CD rates of 12%. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.

Present and future value tables of $1 at 3% are presented below: -Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?

Samson Inc. is contemplating the purchase of a machine that will provide it with cash savings of $100,000 per year for eight years. Interest is 10%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

Below are excerpts from time value of money tables for the 8% rate. -Column 3 is an interest table for the:

Present and future value tables of $1 at 11% are presented below. -Titanic Corporation leased executive limousines under terms of $20,000 to be paid at the inception of the lease, and four equal annual payments of $30,000 to each be paid thereafter on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:

Determine the price of a $200,000 bond issue under each of the following independent assumptions:

Present and future value tables of $1 at 3% are presented below: -Shelley wants to cash in her winning lottery ticket. She can either receive eight $100,000 semiannual payments starting today, or she can receive a single-amount payment today based on a 6% annual interest rate. What is the single-amount payment she can receive today?

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are completed in three years. The cash flow possibilities and probabilities for the restoration costs in three years are as follows: The company's credit-adjusted risk-free interest rate is 5%. The liability that Simpson must record at the beginning of the project for the restoration costs is: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Prepare a time diagram for the future value of an annuity due with three payments of $400. Be sure to indicate the periods in which interest is added.

Santa Cruz Oil is obligated to the State of Nevada to restore leased land to its original condition after its oil drilling activities are completed in four years. The cash flow possibilities are probabilities for the restoration costs in four years are as follows: $\begin{array}{rc}\text { Cash Outflow }&\text { Probability }\\\text { \$20 million } & 20 \% \\30 \text { million } & 40 \% \\40 \text { million } & 30 \% \\50 \text { million } & 10 \%\end{array}$

On January 1, 2018, Mania Enterprises issued 12% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: Determine the price of the bonds at January 1, 2018.

Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years. She should use a table for the:

An annuity is a series of equal periodic payments.