Question 1

Simple interest is computed on principal and on any interest earned that has not been withdrawn.

Accepted Answer

A) True 
 B)False

Question 2

Peter invests €100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?

Accepted Answer

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

Question 3

Dunston Company will receive £200,000 in a future year. If the future receipt is discounted at an interest rate of 10%, its present value is £102,632. In how many years is the £200,000 received?

Accepted Answer

A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years

Question 4

Sue Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of €40,000 accumulated. How should she compute her required annual invest-ment?

Accepted Answer

A)  €40,000 times the future value of a 5-year, 6% ordinary annuity of 1 
B)  €40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1 
C)  €40,000 times the present value of a 5-year, 6% ordinary annuity of 1 
D)  €40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1

Question 5

Angie invested £100,000 she received from her grandmother today in a fund that is expected to earn 10% per annum. To what amount should the investment grow in five years if interest is compounded semi-annually?

Accepted Answer

A)  £155,134 
B)  £161,050 
C)  £162,890 
D)  £177,156

Question 6

Lane Co. has a machine that cost €600,000. It is to be leased for 20 years with rent received at the beginning of each year. Lane wants a return of 10%. Calculate the amount of the annual rent.

Accepted Answer

A)  €64,068 
B)  €71,727 
C)  €89,184 
D)  €70,476

Question 7

Barkley Company will receive £300,000 in a future year. If the future receipt is discounted at an interest rate of 8%, its present value is £189,051. In how many years is the £300,000 received?

Accepted Answer

A)  5 years 
B)  6 years 
C)  7 years 
D)  8 years

Question 8

The risk-free rate of return is defined as the pure rate of return.

Accepted Answer

A) True 
 B)False

Question 9

What amount should an individual have in a 10% bank account today before withdrawal if €5,000 is needed each year for four years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (The balance in the bank account should be zero after the fourth withdrawal.)

Accepted Answer

A)  €5,000 + (€5,000 × 0.909) + (€5,000 × 0.826) + (€5,000 × 0.751) 
B)  €5,000 ÷ 0.683 × 4 
C)  (€5,000 × 0.909) + (€5,000 × 0.826) + (€5,000 × 0.751) + (€5,000 × 0.683) 
D)  €5,000 ÷ 0.909 × 4

Question 10

Vannoy Corporation will invest €50,000 every January 1st for the next six years (2018 - 2023). If Wagner will earn 12% on the investment, what amount will be in the investment fund on December 31, 2023?

Accepted Answer

A)  €205,570 
B)  €230,240 
C)  €405,760 
D)  €454,450

Question 11

What is interest?

Accepted Answer

A)  Payment for the use of money 
B)  An equity investment 
C)  Return on capital 
D)  Loan

Question 12

The market price of a €500,000, ten-year, 12% (pays interest semiannually) bond issue sold to yield an effective rate of 10% is

Accepted Answer

A)  €561,445. 
B)  €562,312. 
C)  €566,635. 
D)  €936,180.

Question 13

What is the relationship between the future value of one and the present value of one?

Accepted Answer

A)  The present value of one equals the future value of one plus one. 
B)  The present value of one equals one plus future value factor for n-1 periods. 
C)  The present value of one equals one divided by the future value of one. 
D)  The present value of one equals one plus the future value factor for n+1 value

Question 14

If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment?

Accepted Answer

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

Question 15

What amount should be recorded as the cost of a machine purchased December 31, 2018, which is to be financed by making 8 annual payments of £8,000 each beginning December 31, 2019? The applicable interest rate is 8%.

Accepted Answer

A)  £56,000 
B)  £49,975 
C)  £85,093 
D)  £45,973

Question 16

Milner Company will invest €400,000 today. The investment will earn 6% for 5 years, with no funds withdrawn. In 5 years, the amount in the investment fund is

Accepted Answer

A)  €400,000. 
B)  €520,000. 
C)  €535,292. 
D)  €536,116.

Question 17

What amount should be deposited in a bank today to grow to £3,000 three years from today?

Accepted Answer

A)  £3,000 ÷ 0.751 
B)  £3,000 × 0.909 × 3 
C)  (£3,000 × 0.909) + (£3,000 × 0.826) + (£3,000 × 0.751) 
D)  £3,000 × 0.751

Question 18

Jeremy Leasing purchases and then leases small aircraft to interested parties. The company is currently determining the required rental for a small aircraft that cost them €600,000. If the lease is for twenty years and annual lease payments are required to be made at the end of each year, what will be the annual rental if Jeremy wants to earn a return of 10%?

Accepted Answer

A)  €64,070 
B)  €70,476 
C)  €10,476 
D)  €30,313

Question 19

On January 2, 2019, Wine Corporation wishes to issue €3,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

Accepted Answer

A)  €3,000,000 
B)  €2,631,204 
C)  €3,000,018 
D)  €3,318,078

Question 20

Anna has $30,000 to invest. She requires €50,000 for a down payment for a house. If she is able to invest at 6%, how many years will it be before she will accumulate the desired balance?

Accepted Answer

A)  6 years 
B)  7 years 
C)  8 years 
D)  9 years

Exam 6: Accounting and the Time Value of Money