Appendix B – Time Value of Money Appendix B Time Value of Money 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 B-1 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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 B-2 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 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 B-3 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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 B-4 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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 B-5 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 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 x1.4185 = $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 B-6 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 15 An annuity is a series of equal payments occurring at 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: 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 B-7 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 18 The present value of $5,000 per year for three years at 12% compounded annually is $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 B-8 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money Multiple 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 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 B-9 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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 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 B-10 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money Difficulty: Hard Learning Objective: B-P2 Topic: Factor Topic: Future Value [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 B-13 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Present Value 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 B-14 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Difficulty: Hard Learning Objective: B-P3 Topic: Factor Topic: Annuity 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 This is the factor for the future value of an annuity of 1, 7%, 10 periods B-15 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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 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 B-16 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 37 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 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 B-17 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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 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 B-18 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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 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 B-19 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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% 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 B-20 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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 B-21 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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 Sierra 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 B-22 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [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 semiannually? 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 B-23 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 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 B-24 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money [Question] 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 B-25 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting 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 B-26 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part Appendix B – Time Value of Money 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] 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 B-27 © 2013 by McGraw-Hill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part ... proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or... proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied, scanned, duplicated, forwarded, distributed, or... 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