TEST BANK FINANCIAL AND MANAGERIAL ACCOUNTING 6TH EDITION WILD TBAppB

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Time Value of Money

True / False Questions

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

True False

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From the perspective of an account holder, a savings account is a liability with interest

True False

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An interest rate is also called a discount rate

True False

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

True False

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The number of periods in a present value calculation may only be expressed in years True False

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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 True False

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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

True False

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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

True False

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The present value of $2,000 to be received nine years from today at 8% interest compounded annually is $1,000

True False

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Sandra has a savings account that has accumulated to $50,000 She started with

$28,225, and earned interest at 10% compounded annually It took her five years to accumulate the $50,000

True False

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

True False

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The number of periods in a future value calculation may only be expressed in years True False

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The future value of $100 compounded semiannually for 3 years at 12% equals

$140.49

True False

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At an annual interest rate of 8% compounded annually, $5,300 will accumulate to a total of $7,210.65 in 5 years

True False

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

True False

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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

True False

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

True False

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

$12,009

True False

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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%

True False

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The future value of an ordinary annuity is the accumulated value of each annuity payment excluding interest as of the date of the final payment

True False

Multiple Choice Questions

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Interest may be defined as:

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

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

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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?

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Jason has a loan that requires a single payment of $4,000 at the end of 3 years The loan's interest rate is 6%, compounded semiannually How much did Jason borrow?

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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?

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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?

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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?

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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?

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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?

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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?

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How long will it take an investment of $25,000 at 6% compounded annually to accumulate to a total of $35,462.50?

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What interest rate is required to accumulate $6,802.50 in four years from an investment of $5,000?

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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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Marc Lewis 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?

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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

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

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What amount can you borrow if you make seven semiannual payments of $4,000 at

an 8% annual rate of interest?

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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?

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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?

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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 $69,080?

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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?

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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

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Jackson has a loan that requires a $17,000 lump sum payment at the end of four years The interest rate on the loan is 5%, compounded annually How much did Jackson borrow today?

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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?

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Define interest

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Explain the concept of the present value of a single amount

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Explain the concept of the future value of a single amount

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Explain the concept of the present value of an annuity

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Explain the concept of the future value of an annuity

Essay Questions

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A company needs to have $200,000 in 4 years, and will create a fund to insure that the $200,000 will be available If it can earn a 7% return compounded annually, how much must the company invest in the fund today to equal the $200,000 at the end of

4 years?

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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?

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Kelsey has a loan that requires a $25,000 lump sum payment at the end of three years The interest rate on the loan is 5%, compounded annually How much did Kelsey borrow today?

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Jackson has a loan that requires a $17,000 lump sum payment at the end of four years The interest rate on the loan is 5%, compounded annually How much did Jackson borrow today?

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Mason 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?

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