Question 1

Henry Rector deposited $5,000 in a certificate of deposit that provides interest of 10% compounded quarterly if the amount is maintained for 5 years. How much will Henry have at the end of 5 years? Use the formula approach.

Accepted Answer

The answer of Henry Rector deposited $5,000 in a certificate...

Question 2

Present value factors are determined by two characteristics: the interest rate and the length of the compounding periods.

Accepted Answer

A) True 
 B)False

Question 3

Suppose you borrow money from your parents for college tuition on January 1, 2015. Your parents require four annual payments of $40,000 each, with the first payment due on January 1, 2019. They are charging you 8% annual interest. What is the cost of the college tuition? (Use spreadsheet software or a financial calculator to calculate your answer. Round intermediary calculations two decimal places and round your final answer to the nearest dollar.)

Accepted Answer

A)  $160,000 
B)  $113,336 
C)  $143,084 
D)  $105,171

Question 4

You decide to deposit $3,000 at a local bank for three years at a 5% rate of interest compounded semiannually. The future value of your investment is approximately equal to ________. (Use the formula approach and round your final answer to the nearest dollar.)

Accepted Answer

A)  $3,473 
B)  $3,482 
C)  $3,479 
D)  $3,450

Question 5

BillyBob Corporation deposits $80,000 at the beginning of every quarter in a savings account for the next eight years so that it can purchase a new piece of machinery at the end of eight years. The interest rate is 4%. How much money will BillyBob Corporation have at the end of eight years? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations, and round your final answer to the nearest dollar.)

Accepted Answer

A)  $2,999,525 
B)  $669,482 
C)  $766,624 
D)  $3,029,521

Question 6

In the present value of an annuity due table, the factors ________.

Accepted Answer

A)  increase as the interest rates increase, given a set number of periods 
B)  decrease as the periods increase, given a set interest rate 
C)  increase as the periods decrease, given a set interest rate 
D)  decrease as the interest rates increase, given a set number of periods

Question 7

A deferred annuity is an annuity in which interest is not compounded until a future period.

Accepted Answer

A) True 
 B)False

Question 8

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is ________.

Accepted Answer

A)  an ordinary annuity 
B)  an annuity due 
C)  a deferred annuity 
D)  a compound annuity

Question 9

Paula Poser will receive $80,000 on December 31, 2024, from a trust fund established by her mother. Assuming the appropriate interest rate for discounting is 12% (compounded semiannually), what is the present value of this amount as of January 1, 2020 (5 years earlier)? Use the formula approach.

Accepted Answer

The answer of Paula Poser will receive $80,000 on December...

Question 10

Harlan Corporation deposits $225,000 every June 30th and December 31st in a savings account (beginning in the current year) for the next three years so that it can purchase a new piece of machinery at the end of three years. The interest rate is 4%. How much money will Harlan Corporation have at the end of three years? Use the future value of an ordinary annuity factor table shown below to derive your answer.
$$\begin{array} { | c | c | c | c | c | } 
\hline \text { Periods } & \mathbf { 1 \% } & \mathbf { 2 } \% & \mathbf { 3 } \% & \mathbf { 4 } \% \
\hline 1 & 1 & 1 & 1 & 1 \
\hline 2 & 2.01000 & 2.02000 & 2.03000 & 2.04000 \
\hline 3 & 3.03010 & 3.06040 & 3.09090 & 3.12160 \
\hline 4 & 4.06040 & 4.12161 & 4.18363 & 4.24646 \
\hline 5 & 5.10101 & 5.20404 & 5.30914 & 5.41632 \
\hline 6 & 6.15202 & 6.30812 & 6.46841 & 6.63298 \
\hline 7 & 7.21354 & 7.43428 & 7.66246 & 7.89829 \
\hline 8 & 8.28567 & 8.58297 & 8.89234 & 9.21423 \
\hline 9 & 9.36853 & 9.75463 & 10.15911 & 10.58280 \
\hline 10 & 10.46221 & 10.94972 & 11.46388 & 12.00611 \
\hline
\end{array}$$

Accepted Answer

A)  $1,419,327 
B)  $688,590 
C)  $1,492,421 
D)  $702,360

Question 11

The parents of a recent high school graduate decide to invest the $14,000 she received for her high school graduation in a fund earning 5% annual interest. At the end of the four-year period, she expects to withdraw the money to pay for accumulated college tuition loans. What is the approximate amount that would be available for withdrawal after four years if interest is compounded monthly? (Use spreadsheet software or a financial calculator to calculate your answer. Do not round any intermediary calculations and round your final answer to the nearest dollar.)

Accepted Answer

A)  $17,868 
B)  $17,017 
C)  $2,800 
D)  $17,093

Question 12

A specific present value of an ordinary annuity factor for a given number of periods and a specific discount rate is equal to the cumulative sum of the present value of single sum factors over the given number of periods for that discount rate.

Accepted Answer

A) True 
 B)False

Question 13

The expected cash flow approach encompasses all of the following features in determining a present value of an asset or liability except ________.

Accepted Answer

A)  the market rate of interest 
B)  a range of estimated future cash flows 
C)  the fair value of the asset or liability 
D)  the probabilities of various cash-flow outcomes

Question 14

Maria Gonzales is considering two investment options for a $2,500 gift she received for graduation. Both investments have the same annual interest rates but one offers quarterly compounding while the other compounds on a monthly basis. Which investment should she choose? Why?

Accepted Answer

The answer of Maria Gonzales is considering two investment options...

Question 15

Wasup Corp. is thinking of borrowing $110,000 from its bank at 8% annual interest rate. The amount that will be repaid is $138,568. Assume annual compounding. In approximately how many years will Wasup Corp. need to repay the loan? Use the future value of $1 factor table shown below.
 Excerpt of Future Value of $1 Table
$$\begin{array} { | c | c | c | c | } 
\hline \text { Periods } & \mathbf { 7 \% } & \mathbf { 8 \% } & \mathbf { 9 \% } \
\hline 1 & 1.07000 & 1.08000 & 1.09000 \
\hline 2 & 1.14490 & 1.16640 & 1.18810 \
\hline 3 & 1.22504 & 1.25971 & 1.29503 \
\hline 4 & 1.31080 & 1.36049 & 1.41158 \
\hline 5 & 1.40255 & 1.46933 & 1.53862 \
\hline 6 & 1.50073 & 1.58687 & 1.67710 \
\hline 7 & 1.60578 & 1.71382 & 1.82804 \
\hline
\end{array}$$

Accepted Answer

A)  3 years 
B)  4 years 
C)  5 years 
D)  6 years

Question 16

Which of the following transactions would best use the present value of an annuity due table?

Accepted Answer

A)  Bengatti, Inc. leases a truck for 4 years with annual lease payments of $20,000 to be made at the beginning of each year. 
B)  Turkel Co. leases a warehouse for 9 years with annual lease payments of $150,000 to be made at the end of each year. 
C)  Ponzi, Inc. borrows $60,000 and has agreed to pay back the principal plus interest in three years. 
D)  Skool, Inc. wants to deposit a lump sum to accumulate $80,000 for the construction of a new parking lot in 4 years.

Question 17

A deferred annuity is an annuity for which payments are delayed until the end of each period.

Accepted Answer

A) True 
 B)False

Exam 7: Accounting and the Time Value of Money

Henry Rector deposited $5,000 in a certificate of deposit that provides interest of 10% compounded quarterly if the amount is maintained for 5 years. How much will Henry have at the end of 5 years? Use the formula approach.

Present value factors are determined by two characteristics: the interest rate and the length of the compounding periods.

You decide to deposit $3,000 at a local bank for three years at a 5% rate of interest compounded semiannually. The future value of your investment is approximately equal to ________. (Use the formula approach and round your final answer to the nearest dollar.)

In the present value of an annuity due table, the factors ________.

A deferred annuity is an annuity in which interest is not compounded until a future period.

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is ________.

Paula Poser will receive $80,000 on December 31, 2024, from a trust fund established by her mother. Assuming the appropriate interest rate for discounting is 12% (compounded semiannually), what is the present value of this amount as of January 1, 2020 (5 years earlier)? Use the formula approach.

A specific present value of an ordinary annuity factor for a given number of periods and a specific discount rate is equal to the cumulative sum of the present value of single sum factors over the given number of periods for that discount rate.

The expected cash flow approach encompasses all of the following features in determining a present value of an asset or liability except ________.

Maria Gonzales is considering two investment options for a $2,500 gift she received for graduation. Both investments have the same annual interest rates but one offers quarterly compounding while the other compounds on a monthly basis. Which investment should she choose? Why?

Which of the following transactions would best use the present value of an annuity due table?

A deferred annuity is an annuity for which payments are delayed until the end of each period.