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Exam 6: Time Value of Money Concepts

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Question 31

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Column 1 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) All of the above
F) A) and B)

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Question 32

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The calculation of present value eliminates interest from future cash flows.

A) True
B) False

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Question 33

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Prepare a time diagram for the future value an annuity due with three payments of $400. Be sure to indicate the periods in which interest is added.

Column 4 is an interest table for the:

Mustard's Inc. sold the rights to use one of their patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

Other things being equal, the present value of an annuity due will be less than the present value of an ordinary annuity.

With an ordinary annuity, a payment is made or received on the date the agreement begins.

On February 1, 2009, Lynda Brown, proud mother of newborn daughter Goldie, purchased $600,000 in zero-coupon bonds that mature on February 1, 2029. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%. Required: Calculate the price Lynda paid for the bonds.

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate. $\begin{array}{cccc}& \text { Invested } & \text { Interest } & \text { Number of } \\\text { Item } & \text { Amount } & \text { Rate } & \text { Periods }\\\text { a. } & \$ 40,000 & 7 \% & 20 \\\text { b. } & \$ 20,000 & 6 \% & 25 \\\text { c. } & \$ 50.000 & 11 \% & 10\end{array}$

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?

Describe how present value methods affect Eastern's long-term lease debt.

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:

Ajax Company purchased a five-year certificate of deposit for their building fund in the amount of $220,000. How much should the certificate of deposit be worth at the end of five years if interest is compounded at an annual rate of 9%?

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.

An annuity is a series of equal periodic payments.

DEF Company will issue $2,000,000 in 10%, 10-year bonds when the market rate of interest is 12%. Interest is paid semiannually. Required: Determine how much cash DEF Company should realize from the bond issue.

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:

ABC Company will issue $5,000,000 in 6%, 10-year bonds when the market rate of interest is 8%. Interest is paid semiannually. Required: Determine how much cash ABC Company will realize from the bond issue.

On the last day of its fiscal year ending December 31, 2009, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2029 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2010. 2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2010. Lease B also is for 10 years, beginning January 1, 2010. Terms of the lease require 7 annual lease payments of $60,000 beginning on January 1, 2013. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations. Required: What amounts will appear in Boatright's December 31, 2009, balance sheet for the bonds and for the leases?

Column 3 is an interest table for the: