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Exam 26: Time Value of Money

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Question 1

Multiple Choice

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Interest is:

A) Time.
B) A borrower's payment to the owner of an asset for its use.
C) The same as a savings account.
D) Always a liability.
E) Always an asset.

F) A) and B)
G) A) and E)

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Question 2

Multiple Choice

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A company expects to invest $5,000 today at 12% annual interest and plans to receive $15,529 at the end of the investment period. How many years will elapse before the company accumulates the $15,529?

A) 0.322 years.
B) 3.1058 years.
C) 5 years.
D) 8 years.
E) 10 years.

F) A) and D)
G) A) and E)

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Question 3

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With deposits of $5,000 at the end of each year, you will have accumulated $38,578 at the end of the sixth year if the annual rate of interest is 10% Calculation: $5,000 x 7.7156 = $38,578.

A company is beginning a savings plan. It will be saving $15,000 per year for the next 10 years. How much will the company have accumulated after the tenth year-end deposit, assuming the fund earns 10% interest?

The future value of an ordinary annuity is the accumulated value of each annuity payment with interest one period after the date of the final payment.

What is interest?

Chad is setting up a retirement fund, and he plans on depositing $5,000 per year in an investment that will pay 7% annual interest. How long will it take him to reach his retirement goal of $69,080?

Thompson Company has acquired a machine from a dealer that requires a payment of $45,000 at the end of five years. This transaction includes interest at 8%, compounded semiannually. What is the value of the machine today?

The present value of $2,000 to be received nine years from today at 8% interest compounded annually is $1,000. Calculation: $2,000 x 0.5002 = $1,000.

In a present value or future value table, the length of one time period may be interpreted as one year, one month, or any other length of time.

You are little late planning your retirement, but are looking forward to retiring in 10 years. You expect to save $6,000 a year at an annual rate of 8%. How much will you have accumulated when you retire?

A company is considering an investment that will return $20,000 semiannually at the end of each semiannual period for 4 years. If the company requires an annual return of 10%, what is the maximum amount it is willing to pay for this investment?

A company can use present and future value computations to estimate the interest component of holding assets over time.

A company is considering investing in a project that is expected to return $350,000 four years from now. How much is the company willing to pay for this investment if the company requires a 12% return?

The present value of an annuity table can be used to determine the series of equal payments that are required by a loan agreement.

Daley Co. lends $524,210 to Davis Corporation. The terms of the loan require that Davis make six semiannual period-end payments of $100,000 each. What semiannual interest rate is Davis paying on the loan?

At an annual interest rate of 8% compounded annually, $5,300 will accumulate to a total of $7,210.65 in 5 years. Calculation: $7,210.65/$5,300 = 1.3605. This is the future value of 1 factor for 4 periods, 8%.

Explain the concept of the present value of an annuity.

An _____________ is a series of equal payments occurring at equal intervals.

To calculate present value of an amount, two factors are required: __________________ and __________________.