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Exam 6: Time Value of Money Concepts

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Question 21

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Briefly describe the difference between simple interest and compound interest.

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Simple interest is computed on...

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Question 22

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Sandra won $5,000,000 in the state lottery,which she has elected to receive at the end of each month over the next 30 years.She will receive 7% interest on unpaid amounts.To determine the amount of her monthly check,she should use a table for the:

A) Present value of an annuity due of 1.
B) Future value of an annuity due of 1.
C) Present value of an ordinary annuity of 1.
D) Future value of an ordinary annuity of 1.

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

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Question 23

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Compute the future value of the following invested amounts at the specified periods and interest rates.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Jimmy has $255,906 accumulated in a 401K plan.The fund is earning a low,but safe,3% per year.The withdrawals will take place at the end of each year starting a year from now.How soon will the fund be exhausted if Jimmy withdraws $30,000 each year?

Loan C has the same principal amount,payment amount,and maturity date as Loan D.However,Loan C is structured as an annuity due,while Loan D is structured as an ordinary annuity.Loan C's interest rate is:

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc.for a building with a fair value of $75 million.What interest rate is Mocha earning on financing this land sale?

Reba wishes to know how much would be in her savings account if she deposits a given sum in an account and leaves it there at 6% interest for five years.She should use a table for the:

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

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

Monetary assets include only cash and cash equivalents.

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?

An annuity consists of level principal payments plus interest on the unpaid balance.

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Carol wants to invest money in a 6% CD account that compounds semiannually.Carol would like the account to have a balance of $50,000 five years from now.How much must Carol deposit to accomplish her goal?

DON Corp.is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for five years.At the end of five years,the machine can be sold to realize after-tax cash flows of $5,000.Interest is 12%.Assume the cash flows occur at the end of each year. Required: Calculate the total present value of the cash savings.

Column 6 is an interest table for the:

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Shane wants to invest money in a 6% CD account that compounds semiannually.Shane would like the account to have a balance of $100,000 four years from now.How much must Shane deposit to accomplish his goal?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms.Match each phrase with the number for the correct term.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -A firm leases equipment under a capital lease (analogous to an installment purchase) that calls for 12 semiannual payments of $39,014.40.The first payment is due at the inception of the lease.The annual rate on the lease is 6%.What is the value of the leased asset at inception of the lease?

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Bill wants to give Maria a $500,000 gift in seven years.If money is worth 6% compounded semiannually,what is Maria's gift worth today?