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Exam 13: Time Value of Money

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Question 31

Multiple Choice

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Reba wishes to know how much would be in her savings account in five years if she deposits a given sum in an account that earns 6% interest.She should use a table for the:

A) Future value of $1.
B) Present value of $1.
C) Future value of an annuity of $1.
D) Present value of an annuity of $1.

E) B) and C)
F) None of the above

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Question 32

True/False

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If you put $300 into a savings account that pays annual compound interest of 10% per year and then withdraw the money two years later,you will earn interest of $63.

A) True
B) False

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Question 33

Multiple Choice

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The value today of receiving a series of payments in the future is referred to as the:

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 end of the month,with interest of 12% on the unpaid balance.She should use a table for the:

What is the value today of receiving $5,000 at the end of six years,assuming an interest rate of 8% compounded semiannually?

Claudine Corporation will deposit $5,000 into a money market account 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 account earns 9% interest?

How much will $5,000 invested at the end of each year grow to in six years,assuming an interest rate of 7% compounded annually?

At the end of each quarter,Patti deposits $500 into an account that pays 12% interest compounded quarterly.How much will Patti have in the account in three years?

Miller borrows $300,000 to be paid off in three years.The loan payments are semiannual with the first payment due in six months,and interest is at 6%.What is the amount of each payment?

Compute the future value of the following invested amounts at the specified periods and interest rates. $\begin{array} { l c c c } \text { Item } & \begin{array} { c c c } \text { Invested } \\\text { Amount }\end{array} & \begin{array} { c } \text { Interest } \\\text { Rate }\end{array} & \begin{array} { c } \text { Number } \\\text { of } \\\text { Periods }\end{array} \\\hline\text { a. } & \$ 20,00 & 8 \% &10 \\\text { b. } & \$30,000 & 2 \% & 8 \\\text { c. } & \$ 10,000 & 12 \% & 15\\\end{array}$

Davenport Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $30,000 at the date of employment and another $50,000 two years later.Assuming the employee's time value of money is 8% annually,what lump-sum at employment date would make her indifferent between the two options?

Baird Bros.Construction is considering the purchase of a machine at a cost of $125,000.The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000.The discount rate is 10%.Assume the machine would be paid for on the first day of year one,but that all other cash flows occur at the end of the year.Ignore income tax considerations.Determine if Baird should purchase the machine.

Simple interest is interest earned on the initial investment only.

Michaela would like to have $10,000 for a European vacation in four years.Currently,she has saved $8,000.If she puts $8,000 in an account that earns 6% interest,compounded annually,will she be able to take the vacation in four years?

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

Bill wants to give Maria a $500,000 gift in seven years.If money is worth 6% compounded semiannually,what is Maria's gift worth today?

What is the value today of receiving $5,000 at the end of each year for the next 10 years,assuming an interest rate of 12% compounded annually?

The value that an amount today will grow to in the future is referred to as the:

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate. $\begin{array} { l c c c } \text { Item } & \begin{array} { c c c } \text { Invested } \\\text { Amount }\end{array} & \begin{array} { c } \text { Interest } \\\text { Rate }\end{array} & \begin{array} { c } \text { Number } \\\text { of } \\\text { Periods }\end{array} \\\hline\text { a. } & \$ 40,00 & 7 \% & 20 \\\text { b. } & \$ 20,000 & 6 \% & 25 \\\text { c. } & \$ 50,000 & 11 \% & 10\\\end{array}$

Quaker State Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service.Assuming the employee's time value of money is 10% annually,what lump-sum at employment date would make him indifferent between the two options?