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Exam 6: Time Value of Money Concepts

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Question 1

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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:

A) Present value of 1.
B) Present 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) None of the above
F) A) and B)

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Question 2

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A series of equal periodic payments that starts more than one period after the agreement is called:

A) An annuity due.
B) An ordinary annuity.
C) A future annuity.
D) A deferred annuity.

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

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Question 3

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Column 4 is an interest table for the:

Incognito Company is contemplating the purchase of a machine that provides it with net after-tax 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.

Samson Inc.is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for eight years.Interest is 10%.Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

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

The calculation of future value requires the removal of interest.

Use the following to answer questions Present and future value tables of 1 at 9% are presented below. -How much must be invested now at 9% interest to accumulate to $10,000 in five years?

Dobson Contractors is considering buying equipment at a cost of $75,000.The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000.Interest is at 12%.Assume the equipment purchase 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. Required: Determine if Dobson should purchase the machine.

Kunkle Company wishes to earn 20% annually on its investments.If it makes an investment that equals or exceeds that rate,it considers it a success.Assume that it invests $2 million and gets $500,000 in return at the end of each year for X years.What is the minimum value of X for which it will consider the investment a success? Assume that it can't invest for fractional parts of a year.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Today,Thomas deposited $100,000 in a three-year,12% CD that compounds quarterly.What is the maturity value of the CD?

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500,48-month,11% auto loan.To determine this amount,First Financial would:

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Shelley wants to cash in her winning lottery ticket.She can either receive ten $100,000 semiannual payments starting today,or she can receive a lump-sum payment now based on a 6% annual interest rate.What is the equivalent lump-sum payment?

Listed below are 10 terms followed by a list of phrases that describe or characterize the terms.Match each phrase with the number for the correct term.

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 up front,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.

Yamaha Inc.hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company.The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available.To determine the amount that must be invested each year,a computation must be made using the formula for:

Compound interest includes interest earned on interest.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Monica wants to sell her share of an investment to Barney for $50,000 in three years.If money is worth 6% compounded semiannually,what would Monica accept today?

Use the following to answer questions The note about debt included in the financial statements of Healdsburg Company for the year ended December 31,2015 disclosed the following: Debt.The following table summarizes the long-term debt of the Company at December 31,2015.All of the notes were issued at their face (maturity)value. Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years,compute the following: -The total cash interest payments in 2016 for these notes.

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?