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Exam 6: Accounting and the Time Value of Money

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Question 51

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Which statement is false?

A) The factor for the future value of an annuity due is found by multiplying the ordinary annuity table value by one plus the interest rate.
B) The factor for the present value of an annuity due is found by multiplying the ordinary annuity table value by one minus the interest rate.
C) The factor for the future value of an annuity due is found by subtracting 1.00000 from the ordinary annuity table value for one more period.
D) The factor for the present value of an annuity due is found by adding 1.00000 to the ordinary annuity table value for one less period.

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

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Question 52

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What is not a variable that is considered in interest computations?

A) Principal
B) Interest rate
C) Assets
D) Time

E) C) and D)
F) None of the above

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Question 53

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Present value is

What would you pay for an investment that pays you €20,000 at the end of each year for the next ten years and then returns a maturity value of €300,000 after ten years? Assume that the relevant interest rate for this type of investment is 8%.

Assume ABC Company deposits €50,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?

If two annuities have the same number of rents with the same dollar amount, but one is an annuity due and one is an ordinary annuity, the future value of the annuity due will be greater than the future value of the ordinary annuity.

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of £23,000 payable on the first day of work or a signing bonus of £26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?

Ethan has £50,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to £101,250?

The present value of an ordinary annuity is the present value of a series of equal rents withdrawn at equal intervals.

If €4,000 is put in a savings account today, what amount will be available six years from now?

The rents that comprise an annuity due earn no interest during the period in which they are originally deposited.

The number of compounding periods will always be one less than the number of rents when computing the future value of an ordinary annuity.

Jenks Company financed the purchase of a machine by making payments of £24,000 at the end of each of five years. The appropriate rate of interest was 8%. The future value of one for five periods at 8% is 1.46933. The future value of an ordinary annuity for five periods at 8% is 5.8666. The present value of an ordinary annuity for five periods at 8% is 3.99271. What was the cost of the machine to Jenks?

What amount will be in an 8% bank account three years from now if £6,000 is invested each year for four years with the first investment to be made today?

What interest rate (the nearest percent) must Charlie earn on a €300,000 investment today so that he will have €760,000 after 12 years?

What would you pay for an investment that pays you £20,000 at the end of each year for the next twenty years? Assume that the relevant interest rate for this type of investment is 12%.

For which of the following transactions would the use of the present value of an ordinary annuity concept not be appropriate in calculating the present value of the asset obtained or the liability owed at the date of incurrence?

Compound interest, rather than simple interest, must be used to properly evaluate long- term investment proposals.

An accountant wishes to find the present value of an annuity of 1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of 1 payable at the end of each period. To compute the present value, the accountant would use the present value factor in the 10% column for

Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today?