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Exam 7: Accounting and the Time Value of Money

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Question 41

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A future value is always less than the corresponding present value.

A) True
B) False

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Question 42

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The future amount of an annuity due is determined ________.

A) one period after the last cash payment in the series
B) one period before the last cash payment in the series
C) at the same time as the first cash payment in the series
D) at the same time as the last cash payment in the series

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

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Question 43

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

Annie Laerz wants to invest $20,000 on January 1, 2014, so that she may withdraw 10 annual payments of equal amounts beginning January 1, 2029. If the fund earns 6% annual interest over its life, what will be the amount of each of the withdrawals? (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.)

You decide to deposit $2,000 at a local bank for two years at a 8% rate of interest compounded annually. What is the future value of your investment? (Do not round any intermediary calculations, and round your final answer to the nearest dollar.) Use the formula approach.

An example of a deferred annuity is payments for ________.

What is the primary difference between an ordinary annuity and an annuity due?

Interest calculated on the original principal regardless of the amount of interest that has been paid or accrued in the past is ________.

Future value factors are determined by two characteristics: the interest rate per compounding period and the number of compounding periods.

The relationship between the future value of a single sum and the corresponding present value of a single sum is determined by the interest rate per compounding period and ________.

Compound interest is computed on both the principal and on the accumulated interest.

Jenks Company financed the purchase of a machine by paying $37,000 a year for the next five years, with the first payment due one year from today. The purchase cost of the machine is considered to be the present value of those payments. What was the purchase cost of the machine to Jenks assuming a discount rate of 7%? (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.)

You are provided with two time value of money tables. One is a present value of $1 table and one is a future value of $1 table. How can you tell which table is which type?

A specific future 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 future value of single sum factors over the given number of periods for that discount rate.

What is the time value of money?

Why do accountants need to be familiar with present value concepts?

You have just won the Multi-State Lottery. You have the option of receiving a check for $40,000,000 every year at the end of the next 23 years. The lottery commission also allows you the option of receiving a one-time payment of $414,842,358 when you turn in the winning ticket. What is the approximate interest rate that the lottery commission is using to determine the one-time payment? (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 percent, X%.)

Assume that you have the opportunity to receive $7,000 at the end of each of the next seven years. Given an interest rate of 7%, how much would you be willing to pay for this investment today? Use the present value of an ordinary annuity interest factor table shown below. Excerpt from present value of an ordinary annuity interest factor table $\begin{array} { | c | c | c | c | c | c | } \hline \text { Periods } & \mathbf { 6 \% } & \mathbf { 7 \% } & \mathbf { 8 \% } & \mathbf { 9 \% } & \mathbf { 1 0 \% } \\\hline 1 & 0.94340 & 0.93458 & 0.92593 & 0.91743 & 0.90909 \\\hline 2 & 1.83339 & 1.80802 & 1.78326 & 1.75911 & 1.73554 \\\hline 3 & 2.67301 & 2.62432 & 2.57710 & 2.53129 & 2.48685 \\\hline 4 & 3.46511 & 3.38721 & 3.31213 & 3.23972 & 3.16987 \\\hline 5 & 4.21236 & 4.10020 & 3.99271 & 3.88965 & 3.79079 \\\hline 6 & 4.91732 & 4.76654 & 4.62288 & 4.48592 & 4.35526 \\\hline 7 & 5.58238 & 5.38929 & 5.20637 & 5.03295 & 4.86842 \\\hline\end{array}$

A present value is always less than the corresponding future value.

Bangin Inc. financed the purchase of a machine by making ten annual payments of $19,000 with the first payment due today. The purchase cost of the machine is considered to be the present value of those payments. What was the purchase cost of the machine to Bangin assuming a discount rate of 9%? (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.)