TEST BANK FINANCIAL ACCOUNTING INFORMATION FOR DECISIONS 7TH EDITION WILD TBAppB

Appendix B - Applying Present and Future Values Appendix B Applying Present and Future Values These abbreviated tables can be used with the test questions that are tagged: Factor Present Value of Periods 10 3% 0.9151 0.8885 0.8626 0.8375 0.8131 0.7894 0.7664 0.7441 4% 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 5% 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6139 6% 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 7% 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 8% 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632 9% 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224 10% 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 12% 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 4% 1.1249 1.1699 1.2167 1.2653 1.3159 1.3686 1.4233 1.4802 5% 1.1576 1.2155 1.2763 1.3401 1.4071 1.4775 1.5513 1.6289 6% 1.1910 1.2625 1.3382 1.4185 1.5036 1.5938 1.6895 1.7908 7% 1.2250 1.3108 1.4026 1.5007 1.6058 1.7182 1.8385 1.9672 8% 1.2597 1.3605 1.4693 1.5869 1.7138 1.8509 1.9990 2.1589 9% 1.2950 1.4116 1.5386 1.6771 1.8280 1.9926 2.1719 2.3674 10% 1.3310 1.4641 1.6105 1.7716 1.9487 2.1436 2.3579 2.5937 12% 1.4049 1.5735 1.7623 1.9738 2.2107 2.4760 2.7731 3.1058 6% 2.6730 3.4651 4.2124 4.9173 5.5824 6.2098 6.8017 7.3601 7% 2.6243 3.3872 4.1002 4.7665 5.3893 5.9713 6.5152 7.0236 8% 2.5771 3.3121 3.9927 4.6229 5.2064 5.7466 6.2469 6.7101 9% 2.5313 3.2397 3.8897 4.4859 5.0330 5.5348 5.9952 6.4177 10% 2.4869 3.1699 3.7908 4.3553 4.8684 5.3349 5.7950 6.1446 12% 2.4018 3.0373 3.6048 4.1114 4.5638 4.9676 5.3282 5.6502 Future Value of Periods 10 3% 1.0927 1.1255 1.1593 1.1941 1.2299 1.2668 1.3048 1.3439 Present Value of an Annuity of Periods 10 3% 2.8286 3.7171 4.5797 5.4172 6.2303 7.0197 7.7861 8.5302 4% 2.7751 3.6299 4.4518 5.2421 6.0021 6.7327 7.4353 8.1109 5% 2.7232 3.5460 4.3295 5.0757 5.7864 6.4632 7.1078 7.7217 AppB-1 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Future Value of an Annuity of Periods 10 3% 3.0909 4.1836 5.3091 6.4684 7.6625 8.8923 10.159 11.464 4% 3.1216 4.2465 5.4163 6.6330 7.8983 9.2142 10.583 12.006 5% 3.1525 4.3101 5.5256 6.8019 8.1420 9.5491 11.027 12.578 6% 3.1836 4.3746 5.6371 6.9753 8.3938 9.8975 11.491 13.181 7% 3.2149 4.4399 5.7507 7.1533 8.6540 10.260 11.978 13.816 8% 3.2464 4.5061 5.8666 7.3359 8.9228 10.637 12.488 14.487 9% 3.2781 4.5731 5.9847 7.5233 9.2004 11.029 13.021 15.193 10% 3.3100 4.6410 6.1051 7.7156 9.4872 11.436 13.580 15.937 12% 3.3744 4.7793 6.3528 8.1152 10.089 12.300 14.776 17.549 True / False Questions [Question] Interest is the borrower’s payment to the owner of an asset for its use Answer: TRUE Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] From the perspective of a depositor, a savings account is a liability with interest Answer: FALSE Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-C1 Topic: Interest [Question] AppB-2 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values An interest rate is also called a discount rate Answer: TRUE Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] A company can use present and future value computations to estimate the interest component of holding assets over time Answer: TRUE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-C1 Topic: Interest [Question] The number of periods in a present value calculation can only be expressed in years Answer: FALSE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value [Question] The present value factor for determining the present value of a single sum to be received three years from today at 10% interest compounded semiannually is 0.7462 Answer: TRUE AppB-3 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value Topic: Factor [Question] The present value of 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 Answer: FALSE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value [Question] In a present value or future value table, the length of one time period may be one year, one month, or any other length of time depending on the situation Answer: TRUE Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P1 Learning Objective: B-P2 Topic: Present Value Topic: Future Value [Question] 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 AppB-4 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Feedback: $2,000 x 0.5002 = $1,000 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value Topic: Factor [Question] 10 Sandra has a savings account that is now $50,000 She started with $28,225 and earned interest at 10% compounded annually It took five years to accumulate the $50,000 Answer: FALSE Feedback: $28,225/$50,000 = 0.5645 This is the present value of factor, 10%, periods Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Topic: PV Topic: Factor [Question] 11 Future value can be found if the interest rate (i), the number of periods (n), and the present value (p) are known Answer: TRUE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P2 Topic: Future Value [Question] AppB-5 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values 12 The number of periods in a future value calculation can only be expressed in years Answer: FALSE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P2 Topic: Future Value [Question] 13 The future value of $100 compounded semiannually for three years at 12% equals $140.49 Answer: FALSE Feedback: $100 x 1.4185 = $141.85 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P2 Topic: Future Value Topic: Factor [Question] 14 At an annual interest rate of 8% compounded annually, $5,300 will accumulate to a total of $7,210.65 in five years Answer: FALSE Feedback: $7,210.65/$5,300 = 1.3605 This is the future value of factor for four periods, 8% Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P2 Topic: Factor Topic: Future Value [Question] 15 An annuity is a series of equal payments occurring at equal intervals AppB-6 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Answer: TRUE Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P3 Topic: Annuity [Question] 16 The present value of an annuity table can be used to determine the series of equal payments that are required by a loan agreement Answer: TRUE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P3 Topic: Present Value [Question] 17 An ordinary annuity refers to a series of equal payments made or received at the end of equal intervals Answer: TRUE Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P3 Topic: Ordinary Annuity [Question] 18 The present value of $5,000 per year for three years at 12% compounded annually is AppB-7 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values $12,009 Answer: TRUE Feedback: $5,000 x 2.4018 = $12,009 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] 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% Answer: TRUE Feedback: $5,000 x 7.7156 = $38,578 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P4 Topic: Factor Topic: Future Value Topic: Annuity [Question] 20 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 Answer: FALSE Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P4 Topic: Ordinary Annuity Multiple Choice Questions [Question] AppB-8 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values 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 D Always a liability E Always an asset Answer: B Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] 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? A 12% B 6% C 3% D 2% E 1% Answer: D Feedback: 8% /4 = 2% Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Learning Objective: B-P2 Topic: Factor Topic: Present Value Topic: Future Value Topic: Interest [Question] 23 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 AppB-9 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values a 12% return? A $ 55,606 B $137,681 C $222,425 D $265,764 E $350,000 Answer: C Feedback: $350,000 x 0.6355 = $222,425 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Topic: Factor Topic: Present Value [Question] 24 Sam has a loan that requires a single payment of $4,000 at the end of three years The loan's interest rate is 6%, compounded semiannually How much did Sam borrow? A $3,358.40 B $4,000.00 C $3,660.40 D $4,776.40 E $3,350.00 Answer: E Feedback: $4,000 x 0.8375 = $3,350.00 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Factor Topic: Present Value [Question] 25 A company expects to invest $5,000 today at 12% annual interest and plans to receive AppB-10 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values [Question] 29.Crowe Company has acquired a building with a loan that requires payments of $20,000 every six months for five years The annual interest rate on the loan is 12% What is the present value of the building? A $72,096 B $113,004 C $147,202 D $86,590 E $200,000 Answer: C Feedback: $20,000 x 7.3601 = $147,202 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] 30 Jon Shear expects an investment of $25,000 to return $6,595 annually His investment is earning 10% per year How many annual payments will he receive? A Five payments B Six payments C Four payments D Three payments E More than six payments Answer: A Feedback: $25,000/$6,595 = 3.7908, the present value of an annuity of factor at 10% for five periods Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value AppB-13 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Topic: Annuity [Question] 31 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 Answer: D Feedback: $20,000 x 6.4632 = $129,264 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Annuity Topic: Present Value [Question] 32.What amount can you borrow if you make six quarterly payments of $4,000 at a 12 % annual rate of interest? A $24,838.00 B $21,668.80 C $31,049.00 D $40,000.00 E $44,800,00 Answer: B Feedback: $4,000 x 5.4172 = $21,668.80 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Annuity AppB-14 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Topic: Present Value [Question] 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? A $ 46,320 B $ 67,107 C $100,000 D $144,870 E $215,890 Answer: D Feedback: $10,000 x 14.487 = $144,870 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P4 Topic: Factor Topic: Annuity Topic: Future Value [Question] 34.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? A 13.816 years B 0.072 years C 10 years D 20 years E years Answer: C Feedback: $69,080/$5,000 = 13.816, the future value of an annuity of factor at 7%, 10 periods Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard AppB-15 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Learning Objective: B-P4 Topic: Factor Topic: Future Value Topic: Annuity Short Essay [Question] 35.What is interest? Answer: Interest represents a borrower's payment to the owner of an asset in exchange for its use Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] 36 Explain the concept of the present value of a single amount Answer: The present value of a single amount to be received at a future date is equal to the amount that can be invested now at the specified interest rate to yield the future value Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value [Question] 37 Explain the concept of the future value of a single amount Answer: AppB-16 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values 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 AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P2 Topic: Future Value [Question] 38 Explain the concept of the present value of an annuity Answer: The present value of an annuity is the amount that can be invested now at the specified interest rate to yield a series of equal periodic payments Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P3 Topic: Present Value Topic: Annuity [Question] 39 Explain the concept of the future value of an annuity Answer: The future value of an annuity to be invested at a specified rate of interest is the amount that would accumulate at the date of the final periodic payment Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P4 Topic: Future Value Topic: Annuity AppB-17 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Short Answer Questions [Question] 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? Answer: $200,000 x 0.7629 = $152,580 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Topic: Present Value Topic: Factor [Question] 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? Answer: $25,000 x 0.8638 = $21,595 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Topic: Present Value Topic: Factor [Question] 42 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? Answer: $45,000 x 0.6756 = $30,402 AppB-18 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Topic: Present Value Topic: Factor [Question] 43 A company is creating a fund by depositing $65,763 today The fund will grow to $90,000 after eight years What annual interest rate is the company earning on the fund? Answer: $65,763/$90,000 = 0.7307 This is the present value of factor for eight periods at 4% Alternatively: $90,000/$65,763 = 1.3686 This is the future value of factor for periods at 4% Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Learning Objective: B-P2 Topic: Factor Topic: Present Value Topic: Future Value [Question] 44 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 factor for three periods at 12% This implies the company must earn 12% AppB-19 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Alternatively: $30,000/$21,354 = 1.4049 This is the future value of factor for three periods at 12% Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P1 Learning Objective: B-P2 Topic: Factor Topic: Present Value Topic: Future Value AppB-20 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values [Question] 45 A company has $50,000 today to invest in a fund that will earn 7% How much will the fund contain at the end of eight years? Answer: $50,000 x 1.7182 = $85,910 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P2 Topic: Factor Topic: Future Value [Question] 46.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 to pay 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 AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P2 Topic: Factor Topic: Future Value AppB-21 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values [Question] 47 Madera Iron Sculpting is planning to save the money needed to replace one of its robotic welders in five years by making a one-time deposit of $20,000 today and four yearly contributions of $5,000 beginning at the end of year The deposits will earn 10% interest How much money will Madera have accumulated at the end of five years to replace the welder? Answer: Future value of $20,000 deposit Future value of $5,000 payments Total accumulated $20,000 x 1.6105 = $5,000 x 4.6410 = $32,210 23,205 $55,415 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P2 Learning Objective: B-P4 Topic: Factor Topic: Future Value Topic: Annuity [Question] 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 AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity AppB-22 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values [Question] 49 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% compounded annually? Answer: $9,000 x 6.4632 = $58,168.80 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] 50 When you reach retirement age, you will have one fund of $100,000 from which you are going to make annual withdrawals of $14,702 The fund will earn 6% per year For how many years will you be able to draw an even amount of $14,702? Answer: Nine years Feedback: $100,000/$14,702 = 6.8017, the present value of annuity factor at 6% for nine periods Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] AppB-23 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values 51 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: $883,212/$120,000 = 7.3601 This is the present value of an annuity factor at 6% for 10 periods It will take 10 years to pay off the loan Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] 52 Daley Co lends $524,210 to Davis Corporation The terms of the loan require that Davis repay the loan with six semiannual period-end payments of $100,000 each What semiannual interest rate is Davis paying on the loan? Answer: $524,210/$100,000 = 5.2421 This is the present value of an annuity factor for periods at 4% Davis is paying a 4% semiannual rate, or 8% annual rate of interest Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value Topic: Annuity [Question] AppB-24 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values 53 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? Answer: $15,000 x 15.937 = $239,055 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P4 Topic: Factor Topic: Future Value Topic: Annuity [Question] 54 You hope to retire in 10 years Regrettably you are only just now beginning to save money for this purpose You expect to save $6,000 a year at an annual rate of 8% How much will you have accumulated when you retire? Answer: $6,000 x 14.487 = $86,922 Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P4 Topic: Factor Topic: Future Value Topic: Annuity [Question] 55 A company is setting up a sinking fund to pay off $8,654,000 in bonds that are due in seven years The fund will earn 7% interest, and the company intends to put away a series of equal year-end amounts for seven years What amount must the company deposit annually? Answer: $8,654,000/8.654 = $1,000,000 annually Blooms Taxonomy: Apply AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting AppB-25 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values Difficulty: Hard Learning Objective: B-P4 Topic: Factor Topic: Annuity Topic: Present Value Fill-in-the-Blank [Question] 56. _ is a borrower's payment to the owner of an asset for its use Answer: Interest Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] 57 The interest rate is also called the rate Answer: discount Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-C1 Topic: Interest [Question] 58 To calculate present value of an amount, two factors are required: and _ Answer: interest rate (i); number of time periods (n) Blooms Taxonomy: Understand AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AppB-26 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Appendix B - Applying Present and Future Values AICPA FN: Measurement AICPA FN: Reporting Difficulty: Medium Learning Objective: B-P1 Topic: Present Value [Question] 59 An _ is a series of equal payments occurring at equal intervals Answer: annuity Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P3 Topic: Annuity [Question] 60.The future value of an annuity is the accumulated value of each annuity payment with interest as of the date of the final payment Answer: ordinary Blooms Taxonomy: Remember AACSB: Analytic AACSB: Communications AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Easy Learning Objective: B-P4 Topic: Ordinary Annuity AppB-27 Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... $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... $65,763/$90,000 = 0.7307 This is the present value of factor for eight periods at 4% Alternatively: $90,000/$65,763 = 1.3686 This is the future value of factor for periods at 4% Blooms Taxonomy: Apply AACSB:... 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 factor for three periods at