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Exam 6: Time Value of Money Concepts

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Question 41

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George Jones is planning on a cruise for his 70th 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:

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

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

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Question 42

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Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. Interest is at 10%. Assume the machine 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 Baird should purchase the machine.

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Question 43

Multiple Choice

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Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. At what amount should this debt be valued at its inception?

Explain how you would compute the imputed interest on cash borrowed at zero percent interest when the market rate of interest is eight percent.

Briefly explain how you would arrive at the monthly payment for a 48-month loan where the first payment is due one month from the loan date. In your explanation, include the use of present and future value tables.

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 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.

Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years. Interest is 8%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

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

Compute the future value of the following invested amounts at the specified periods and interest rates. $\begin{array}{cccc}& \text { Invested } & \text { Interest } & \text { Number of } \\\text { Item } & \text { Amount } & \text { Rate } & \text { Periods }\\\text { a. } & \$ 20,000 & 8 \% & 10 \\\text { b. } & \$ 30,000 & 4 \% & 8 \\\text { c. } & \$ 10,000 & 12 \% & 15\end{array}$

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 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.

When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

Given identical current amounts owed and identical interest rates, annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

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?

On October 1, 2009, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2010. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

Two banks each have annual CD rates of twelve percent. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.

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:

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?

Micro Brewery borrows $300,000 to be paid off in three 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?

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?