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Exam 6: Time Value of Money Concepts

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Question 1

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Column 2 is an interest table for the:

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

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

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Question 2

Multiple Choice

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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?

A) $23,026.
B) $57,737.
C) $62,711.
D) None of these is correct.The lump sum equivalent would be $8,000 + the present value of a $20,000 ordinary annuity where n=3 and i=10%.That is, $8,000 + ($20,000 x 2.48685 from Table 4) = $57,737.

E) A) and C)
F) All of the above

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Question 3

Multiple Choice

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On January 1, 2009, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2012. You are eager to earn 3%. What is the present value of the investment on January 1, 2009?

Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% a year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

An investment product promises to pay $42,000 at the end of ten years. If an investor feels this investment should produce a rate of return of 12 percent, compounded annually, what's the most the investor should be willing to pay for the investment?

Polo Publishers purchased a multi-color offset press with terms of $50,000 down 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:

Most, but not all, liabilities are monetary liabilities.

Column 5 is an interest table for the:

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18 percent interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

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?

Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.

A firm leases equipment under a capital lease (analogous to an installment purchase) that calls for twelve semiannual payments of $39,014.40. The first payment is due at the inception of the lease. The annual rate on the lease is 6%. What is the value of the leased asset at inception of the lease?

Shane wants to invest money in a 6% CD account that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal?

Today Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?

Compound interest includes interest earned on interest.

Prepare a time diagram for the future value an ordinary annuity with three payments of $300. Be sure to indicate the periods in which interest is added.

How would the amount of Eastern's long-term lease debt be different if no interest was imputed?

On May 1, 2009, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in zero-coupon bonds that mature on May 1, 2029. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. Required: Calculate the price Bo paid for the bonds.

Which of the following must be known to compute the interest rate paid from financing an asset purchase with an annuity?