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Exam 6: Time Value of Money Concepts

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Question 1

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Compound interest includes interest earned on interest.

A) True
B) False

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Question 2

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On January 1, 2018, Glanville Company sold goods to Otter Corporation. Otter signed an installment note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2018. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2018 of:

A) $90,000.
B) $69,343.
C) $74,891.
D) None of these answer choices are correct.

E) A) and D)
F) B) and C)

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Question 3

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When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

The calculation of present value eliminates interest from future cash flows.

Incognito Company is contemplating the purchase of a machine that provides it with cash savings of $80,000 per year for five years. Interest is 8%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

Present and future value tables of $1 at 3% are presented below: -Jimmy has $255,906 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place at the end of each year starting a year from now. How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?

Present and future value tables of $1 at 9% are presented below. -An investment product promises to pay $42,000 at the end of 10 years. If an investor feels this investment should produce a rate of return of 12%, compounded annually, what's the most the investor should be willing to pay for the investment?

Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid the same day as buying the machinery, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values. Required: Determine which machine should be chosen based on present value considerations.

Under the MLB deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Sosa has had $5,000 deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%. Required: a. How much has accumulated in Sosa's deferred compensation account? b. How much will Sosa be able to withdraw at the beginning of each year if he elects to receive payments for 20 years? c. For how many years will Sosa be able to receive payments if he chooses to receive $115,000 per year at the beginning of each year?

Present and future value tables of $1 at 3% are presented below: -Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive one lump-sum payment today based on a 3% annual interest rate. What would be the lump-sum payment?

On February 1, 2018, Lynda Brown, proud mother of newborn daughter Goldie, purchased $600,000 in zero-coupon bonds that mature on February 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%. Required: Calculate the price Lynda paid for the bonds.

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

Below are excerpts from time value of money tables for the 8% rate. -Column 6 is an interest table for the:

Present and future value tables of $1 at 9% are presented below. -Claudine Corporation will deposit $5,000 into a money market sinking fund at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the sinking fund earns 9% interest?

On January 1, 2018, Bishop Company issued 10% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required: Determine the price of the bonds at January 1, 2018.

DEF Company will issue $2,000,000 in 10%, 10-year bonds when the market rate of interest is 12%. Interest is paid semiannually. Required: Determine how much cash DEF Company should realize from the bond issue.

An annuity consists of level principal payments plus interest on the unpaid balance.

DON Corp. is contemplating the purchase of a machine that will produce cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year. Required: Calculate the total present value of the cash savings.

Present and future value tables of $1 at 11% are presented below. -Polo Publishers purchased a multi-color offset press with terms of $50,000 to be paid at the date of purchase, and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:

Adam Baum Company borrowed $48,000 from B. A. Ware on January 1, 2018, and signed a three-year, 6% installment note to be paid in three equal payments at the end of each year. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.67301. Required: Calculate the amount of one installment payment.