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Exam 6: Time Value of Money Concepts

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Question 61

Multiple Choice

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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:

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

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

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Question 62

Multiple Choice

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Column 5 is an interest table for the:

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

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

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Question 63

Multiple Choice

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Column 4 is an interest table for the:

Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.

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.

Jackpot Mining is obligated to the State of California to restore leased land to its original condition after its mining activities are over in six years. The cash flow possibilities and probabilities for the restoration costs in six years are as follows: The company's credit-adjusted risk-free interest rate is 4%. Required: Calculate the liability that Jackpot must record at the beginning of the project for the restoration costs.

Simpson Mining is obligated to restore leased land to its original condition after its excavation activities are over in three years. The cash flow possibilities and probabilities for the restoration costs in three years are as follows: The company's credit-adjusted risk-free interest rate is 5%. The liability that Simpson must record at the beginning of the project for the restoration costs is:

Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1 will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2 will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year. Assume the purchase cost is paid up front, but that maintenance is paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values. Required: Determine which machine should be chosen based on present value considerations.

On February 1, 2013, Lynda Brown, proud mother of newborn daughter Goldie, purchased $600,000 in zero-coupon bonds that mature on February 1, 2033. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 12%. Required: Calculate the price Lynda paid for the bonds.

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.

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?

Under the NBA deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Rodman has had $6,000 deposited at the end of each year for 30 years, and that the long-term interest rate has been 8%. Required: a. How much has accumulated in Rodman's deferred compensation account? b. How much will Rodman be able to withdraw at the beginning of each year if he elects to receive payments for 15 years? c. How many years will Rodman be able to receive payments if he chooses to receive $65,000 per year at the beginning of each year?

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?

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