A company can use present and future value computations to estimate the interest component of holding assets over time... The present value of 1 formula is often useful when a borrowed a
Trang 1Appendix B Time Value of Money
These abbreviated tables can be used with the test questions that are tagged: Factor
Trang 34 A company can use present and future value computations to estimate the interest component
of holding assets over time
Trang 4Blooms Taxonomy: Apply
7 The present value of 1 formula is often useful when a borrowed asset must be repaid in full at
a later date and the borrower wants to know its worth at the future date
Topic: Present Value
Topic: Future Value
[Question]
9 The present value of $2,000 to be received nine years from today at 8% interest compounded annually is $1,000 (rounded to full dollar amount)
Answer: TRUE
Trang 5Feedback: $28,225/$50,000 = 0.5645 This is the present value of 1 factor, 10%, 6 periods.
Blooms Taxonomy: Apply
Trang 6Feedback: $7,210.65/$5,300 = 1.3605 This is the future value of 1 factor for four periods, 8%.
Blooms Taxonomy: Remember
Trang 9Multiple Choice Questions
[Question]
21 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
22 Which interest rate column would you use to determine the factor from a present value table
or a future value table for 8% compounded quarterly?
Topic: Present Value
Topic: Future Value
Topic: Interest
B-9
Trang 1125 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?
Present value of 1 at 0.3220 is 12%, 10 periods
Blooms Taxonomy: Apply
Topic: Present Value
Topic: Future Value
Trang 12Feedback: $35,462.50/$25,000 = 1.4185, the future value of 1 at 6% for six periods
Blooms Taxonomy: Apply
Feedback: $6802.50/$5,000 = 1.3605, the future value of 1 factor at 8% for four periods
Blooms Taxonomy: Apply
Trang 13$25,000/$6,595 = 3.7908, the present value of an annuity of 1 factor at 10% for five periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
B-13
Trang 1431 A company is considering an investment that will return $20,000 at the end of each
semiannual period for four years If the company requires an annual return of 10%, what is the maximum amount it is willing to pay for this investment?
A Not more than $63,398
B Not more than $126,796
C Not more than $80,000
D Not more than $129,264
E Not more than $160,000
Trang 15AICPA BB: Critical Thinking
33 An individual is planning to set-up an education fund for her children She plans to invest
$10,000 annually at the end of each year She expects to withdraw money from the fund at the end of 10 years and expects to earn an annual return of 8% What will be the total value of the fund at the end of 10 years?
Trang 16Interest represents a borrower's payment to the owner of an asset in exchange for its use
Blooms Taxonomy: Remember
Trang 1737 Explain the concept of the future value of a single amount
Answer:
The future value of a single amount is equal to the amount that would accumulate at a future date
at a specified rate of interest
Blooms Taxonomy: Remember
Trang 18Blooms Taxonomy: Remember
40 A company needs to have $200,000 in four years, and will create a fund to ensure that the
$200,000 will be available If they can earn a 7% return, how much must the company invest in the fund today to equal the $200,000 at the end of four years?
41 Annette has a loan that requires a $25,000 payment at the end of three years The interest rate
on the loan is 5%, compounded annually How much did Annette borrow today?
Trang 1942 Thompson Company has acquired a machine from a dealer which 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?
This is the future value of 1 factor for 8 periods at 4%
Blooms Taxonomy: Apply
Topic: Present Value
Topic: Future Value
B-19
Trang 2044 A company is setting aside $21,354 today and wishes to have $30,000 at the end of three years for a down payment on a piece of property What interest rate must the company earn? Answer: $21,354/$30,000 = 0.7118
This is the present value of 1 factor for three periods at 12% This implies the company must earn 12%
Alternatively: $30,000/$21,354 = 1.4049 This is the future value of 1 factor for three periods at 12%
Blooms Taxonomy: Apply
Topic: Present Value
Topic: Future Value
Trang 2146.Troy has $105,000 now He has a loan of $175,000 that he must pay at the end of five years
He can invest his $105,000 at 10% interest compounded semiannually Will Troy have enough topay his loan at the end of the five years?
Answer: $105,000 x 1.6289 = $171,034.50
No, Troy will be $3,965.50 short of his goal of $175,000
Blooms Taxonomy: Apply
Trang 22Future value of $20,000 deposit $20,000 x 1.6105 = $32,210
Future value of $5,000 payments $5,000 x 4.6410 = 23,205
48 A company borrows money from the bank by promising to make six annual year-end
payments of $25,000 each How much is the company able to borrow if the interest rate is 9%? Answer: $25,000 x 4.4859 = $112,147.50
Blooms Taxonomy: Apply
Trang 2349 A company borrows money from the bank by promising to make eight semiannual payments
of $9,000 each How much is the company able to borrow if the interest rate is 10% compoundedsemiannually?
Answer: Nine years
Feedback: $100,000/$14,702 = 6.8017, the present value of 1 annuity factor at 6% for nine periods
Blooms Taxonomy: Apply
Trang 2451 Big League Sports borrowed $883,212 and must make annual year-end payments of
$120,000 each If the applicable interest rate is 6%, how many years will it take Big League Sports to pay off the loan?
Answer: $524,210/$100,000 = 5.2421
This is the present value of an annuity factor for 6 periods at 4%
Davis is paying a 4% semiannual rate, or 8% annual rate of interest
Blooms Taxonomy: Apply
Trang 2553 A company is beginning a savings plan It will save $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?
Trang 26AICPA BB: Critical Thinking
Trang 27Blooms Taxonomy: Understand