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Exam 6: Time Value of Money Concepts

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Question 31

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

A) Fair value of the asset purchased, number and dollar amount of the annuity payments.
B) Present value of the annuity, dollar amount and timing of the annuity payments.
C) Fair value of the asset and timing of the annuity payments.
D) Number of annuity payments and future value of the annuity.

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

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Question 32

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King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?

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Question 33

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George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

Mary Alice just won the lottery and is trying to decide between the annual cash flow payment option of $250,000 per year for 25 years beginning today and the lump-sum option. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives?

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?

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.

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

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?

How much must be deposited at the beginning of each year to accumulate to $10,000 in four years if interest is at 9%?

Taylor's tractor-trailer rigs sell for $150,000. A customer wishes to buy a rig on a lease purchase plan over seven years, with the first payment to be made at the inception of the lease. Interest is at 12%. Required: a. Compute the amount of the annual lease payment and the gross amount (total payments) due under the lease. b. Compute the amount of interest income earned by Taylor's for the first year of the lease.

Rosie's Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

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?

Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2013, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over the principal payment only on Healdsburg 's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

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.

The calculation of future value requires the removal of interest.

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.

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?

An annuity is a series of equal periodic payments.

The total cash interest payments in 2013 for these notes.