TEST BANK FINANCIAL ACCOUNTING FUNDAMENTALS 5TH EDITION WILD app b test bank FINAL

Present value computations Learning Objective: APPB-C1 Topic: Present and Future Value Concepts 23.. Learning Objective: APPB-P1 Learning Objective: APPB-P2 Topic: Present Value of a Sin

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APPENDIX B PRESENT AND FUTURE VALUES IN ACCOUNTING

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Present Value of an Annuity of 1

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True / False Questions

1 Interest is the borrower’s payment to the owner of an asset for its use

Learning Objective: APPB-C1

Topic: Present and Future Value Concepts

2 From the perspective of an account holder, a savings account is a liability with interest Answer: False

3 An interest rate is also called a discount rate

Learning Objective: APPB-P1

Topic: Present Value of a Single Amount

4 Present and future value computations enable companies to measure or estimate the interestcomponent of holding assets or liabilities over time

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5 The number of periods in a present value calculation may only be expressed in years Answer: False

6 The present value factor for determining the present value of $6,300 to be received three years from today at 10% interest compounded semiannually is 0.7462

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 the worth of the asset at the future date

8 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

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9 The present value of $2,000 to be received nine years from today at 8% interest

Feedback: Present Value = Future Value * Interest Factor for 9 years @8%

Feedback: PV Factor = Present Value/Future Value

PV Factor = $28,225/$50,000 = 0.5645

0.5645 is the present value of 1 factor, 10%, 6 periods

11 Future value can be found if the interest rate (i), the number of periods (n), and the presentvalue (p) are known

Topic: Future Value of a Single Amount

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12 The number of periods in a future value calculation may only be expressed in years Answer: False

13 The future value of $100 compounded semiannually for 3 years at 12% equals $140.49 Answer: False

Feedback: Future Value = Present Value * Interest Factor

Feedback: FV Factor = Future Value/Present Value

FV Factor = $7,210.65/$5,300 = 1.3605

1.3605 is the future value of $1 factor, 8%, 4 periods

15 An annuity is a series of equal payments occurring at equal intervals

Answer: True

Blooms: Remember

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16 The present value of an annuity table can be used to determine the value today of a series

of payments to be received in the future

Topic: Present Value of an Annuity

17 A series of equal payments made or received at the end of each period is an ordinary annuity

18 The present value of $5,000 per year for three years at 12% compounded annually is

Feedback: 2.4018 is the PV factor on the Present Value of an Annuity table; n = 3; i = 12%

Present Value of an Annuity = Annuity * PV Factor

Present Value of an Annuity = $5,000 * 2.4018 = $12,009

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19 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%

Topic: Future Value of an Annuity

Feedback: 7.7156 is the FV factor on the Future Value of an Annuity table; n = 6;

i = 10%

Future Value of an Annuity = Annuity * FV Factor

Future Value of an Annuity = $5,000 * 7.7156 = $38,578

7.7156 is the interest factor on the Future Value of an Annuity table;

Multiple Choice Questions

21 Interest may be defined as:

A Time

B A borrower’s payment to the owner of an asset for its use

C The future value of a present amount

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22 If we want to know the value of present-day assets at a future date, we can use:

A Present value computations

23 Which interest rate column would you use from a present value or future value table for 8% interest compounded quarterly?

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24 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?

Feedback: The PV factor on the Present Value table when n =4 and i = 12% is 0.6355

Present Value = Future Value * PV Factor

Feedback: 3 years = 6 semiannual periods; 6% annual interest = 3%

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26 Patricia wants to invest a sum of money today that will yield $10,000 at the end of 6 years Assuming she can earn an interest rate of 6% compounded annually, how much must she invest today?

Feedback: The PV factor on the Present Value table when n =6 and i = 6% is 0.7050

Present Value = $10,000 * 0.7050 = $7,050.00

27 Marshall has received an inheritance and wants to invest a sum of money today that will yield $5,000 at the end of each of the next 10 years Assuming he can earn an interest rate of 5% compounded annually, how much of his inheritance must he invest today?

Feedback: The PV factor on the Present Value of an Annuity table when n =10 and i = 5% is 7.7217

Present Value = Future Annuity Value * PV Factor

Present Value = $5,000 * 7.7217 = $38,608.50

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28 Cody invests $1,800 per year from his summer wages at a 4% annual interest rate He plans to take a European vacation at the end of 4 years when he graduates from college How much will he have available to spend on his vacation?

Feedback: The FV factor on the Future Value of an Annuity table when n =4 and i

= 4% is 4.2465

Future Value = Annuity Value * FV Factor

Future Value = $1,800 * 4.2465 = $7,643.70

29 Jessica received a gift of $7,500 at the time of her high school graduation She invests it

in an account that yields 10% compounded semi-annually What will the value of Jessica’s investment be at the end of 5 years?

Feedback: Five years = 10 semiannual periods and a 10% annual interest rate = 5% semiannually

The FV factor on the Future Value of 1 table when n =10 and i = 5% is 1.6289

Future Value = Present Value * FV Factor

Future Value = $7,500 * 1.6289 = $12,216.75

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30 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 companyaccumulates the $15,529?

Feedback: Present Value = Future Value * PV Factor

$5,000 = $15,529 * PV Factor

PV Factor = 0.3220

0.3220 is the PV factor on the Present Value table; i = 12%; n = 10

Or, Alternative Solution:

$15,529 = $5,000 * FV Factor

Interest Factor = 3.1058;

3.1058 is the FV factor on the Future Value table; i = 12%; n = 10

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31 Keisha has $3,500 now and plans on investing it in a fund that will pay her 12% interest compounded quarterly How much will Keisha have accumulated after 2 years?

Feedback: Two years = 8 quarterly periods and a 12% annual interest rate = 3% quarterly

The FV factor on the Future Value of 1 table where i = 3% and n = 8 is 1.2668

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1.4185 is the interest factor on the Future Value table; i = 6%; n = 6

33 What interest rate is required to accumulate $6,802.50 in four years from an investment of

Feedback: Present Value = Future Value * PV Factor

$5,000 = $6,802.50 * PV Factor; PV Factor = 0.7350

0.7350 is the PV factor on the Present Value table; n = 4; i = 8%

Or, Alternative Solution: Future Value = Present Value * FV Factor

$6,802.50 = $5,000 * FV Factor; Interest Factor = 1.3605

1.3605 is the FV factor on the Future Value table; n = 4; i = 8%

34 Russell Company has acquired a building with a loan that requires payments of $20,000 every six months for 5 years The annual interest rate on the loan is 12% What is the present value of the building?

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Feedback: The PV factor on the Present Value of an Annuity table when n = 5 and i = 12% is 7.3601.

Present Value of an Annuity = Annuity * PV Factor

Present Value of an Annuity = $20,000 * 7.3601 = $147,202

35 Marc Lewis expects an investment of $25,000 to return $6,595 annually His investment isearning 10% per year How many annual payments will he receive?

Feedback: Present Value of an Annuity = Annuity * PV Factor

$25,000 = $6,595 * PV Factor; PV Factor = 0.3.7908

3.7908 is the PV factor on the Present Value of an Annuity table; i = 10%; n = 5

36 A company is considering an investment that will return $22,000 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 Not more than $69,738

B Not more than $139,476

C Not more than $ 88,000

D Not more than $142,190

E Not more than $176,000

Feedback: The PV factor on the Present Value of an Annuity table when n = 8 and

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37 What amount can you borrow if you make six quarterly payments of $4,000 at a 12 % annual rate of interest?

Feedback: The PV factor on the Present Value of an Annuity table when n = 6 and i = 3% is 5.4172 Present Value of an Annuity = Annuity * PV Factor

Present Value of an Annuity = $4,000 * 5.4172 = $21,668.80

38 What amount can you borrow if you make seven semiannual payments of $4,000 at an 8%annual rate of interest?

Feedback: An 8% annual interest rate = 4% semiannually

The PV factor on the Present Value of an Annuity table when n = 7 and i

= 4% is 6.0021 Present Value of an Annuity = Annuity * PV Factor

Present Value of an Annuity = $4,000 * 6.0021= $24,008.40

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39 An individual is planning to set-up an education fund for her daughter She plans to invest

$7,000 annually at the end of each year She expects to withdraw money from the fund at the end of 9 years and expects to earn an annual return of 8% What will be the total value of the fund at the end of 9 years?

Feedback: The FV factor on the Future Value of an Annuity table when n =9 and i

= 8% is 12.4876.

Future Value of an Annuity = $7,000 * 12.4876 = $87,413

40 An individual is planning to set-up an education fund for his grandchildren He plans to invest $10,000 annually at the end of each year He 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?

Feedback: The FV factor on the Future Value of an Annuity table when n =10 and

i = 8% is 14.4866.

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41 Clara is setting up a retirement fund, and she plans on depositing $5,000 per year in an investment that will pay 7% annual interest How long will it take her to reach her retirement goal of $69,082?

Feedback: Future Value of an Annuity = Annuity * Interest Factor

$69,082 = $5,000 * Interest Factor; Interest Factor = 13.8164

13.8164 is the interest factor on the Future Value of an Annuity table; i= 7%; n = 10

42 The Masterson family is setting up a vacation fund, and they plan on depositing $1,000 per quarter in an investment that will pay 12% annual interest What amount will they have available for their vacation at the end of 2 years?

Feedback: Two years = 8 semiannual periods and a 12% annual interest rate = 3% semiannually

The FV factor on the Future Value of an Annuity table when n= 8; i = 3% is 8.8923

Annuity * FV Factor = Future Value of an Annuity

$1,000 * 8.8923 = $8,892.30

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43 A company needs to have $150,000 in 5 years, and will create a fund to insure that the

$150,000 will be available If it can earn a 6% return compounded annually, how much must the company invest in the fund today to equal the $150,000 at the end of 5 years?

Feedback: The PV factor on the Present Value of 1 table when n = 5 and i = 6%

Feedback: The PV factor on the Present Value of 1 table when n = 4 and i = 5% is 0.8227

Present Value = $17,000 * 0.8227 = $13,986

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45 A company has $46,000 today to invest in a fund that will earn 4% compounded annually How much will the fund contain at the end of 6 years?

Feedback: The FV factor on the Future Value of 1 table when n = 6 and i = 4% is 1.2653

47 Explain the concept of the present value of a single amount

Answer: The present value of a single amount is used to find today’s value for an amount to

be received at a future date It is equal to the amount that can be invested now at the specifiedinterest rate to yield the future value

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