ACCT II - Ch 5 Time Value of Money

Jacob Lee invested $600 in a savings account paying 8% interest compounded twice a year. What will be his investment balance at the end of the year? Round to the nearest dollar.

• 680

• 649

• 624

• 600

Answer explanation

Initial deposit  $600

After 6 months  4%* × $600 = $24  $624

End of year  4%* × $624 = $25  $649

*8%/2 = 4% semi-annual rate.

Oliver Kim invests $5,000 in a bank account earning 8% interest compounding annually. How much will he have in his account in four years? The future value of $1 at 8% for four years is 1.36049 per Table 1 (Future Value of $1). Round to the nearest dollar.

• 5.412

• 5,937

• 6802

• 6242

Answer explanation

FV =  I × FV Factor

The Versa Tile Company purchased a delivery truck on February 1, 2021. The agreement required Versa Tile to pay the purchase price of $44,000 on February 1, 2022.

Assuming an 8% rate of interest, to calculate the price of the truck Versa Tile would multiply $44,000 by the:

• Future value of an ordinary annuity of $1

• Future value of an ordinary annuity of $1

• Present value of an ordinary annuity of $1

• Future value of $1

Answer explanation

The calculation is for the present value today of the $44,000 to be paid one year from now.

Turp and Tyne Distillery is considering investing in a two-year project. The company’s required rate of return is 10%. The present value of $1 for one period at 10% is .909 and .826 for two periods at 10%. The project is expected to create cash flows, net of taxes, of $240,000 in the first year, and $300,000 in the second year. The distillery should invest in the project if the project’s cost is less than or equal to:

• 446,040

• 465,960

• 540,000

• 490,860

Answer explanation

$218,160  ($240,000 × 0.909) 

  247,800  ($300,000 × 0.826)

$465,960

If you have a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information do you need to calculate the present value of the series of payments?

• The timing of the payments (whether they are at the beginning or end of the period)

• The future value of the annuity

• No other information is needed

• The rate of inflation

Answer explanation

If the payments are made at the end of each period, it is an ordinary annuity. If the payments are made at the beginning of each period, it is an annuity due.

On May 31, 2021, the Gusto Beer Company leased a machine from B. A. Lush, Inc. The lease agreement requires Gusto to pay six annual payments of $16,000 on each May 31, with the first payment due on May 31, 2021. Assuming an interest rate of 6% and that this lease is treated as an installment sale (capital lease), Gusto will initially value the machine by multiplying $16,000 by which of the following?

• Present value of $1 at 6% for six periods

• Present value of an ordinary annuity of $1 at 6% for six periods

• Present value of an annuity due of $1 at 6% for six periods

• Future value of an annuity due of $1 at 6% for six periods

Answer explanation

Present value of an annuity due of $1 at 6% for six periods. The calculation is how much is recorded today, the present value of equal payments that start today (annuity due).

The Omagosh Company purchased office furniture for $25,800 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%.

The present value of an ordinary annuity for five periods at 8% is 3.99271.

The present value of an annuity due for five periods at 8% is 4.31213.

What is the required annual installment payment?

• 5,160

• 6,462

• 5,983

• 4,398

Answer explanation

$25,800 ÷ 3.99271* = $ 6,462    

  *present value of an ordinary annuity for five periods at 8%

Harry Byrd’s Chicken Shack agrees to pay an employee $50,000 a year for six years beginning two years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit?

• Future value of $1

• Future value of a deferred annuity

• Present value of a deferred annuity

• None of the above

Answer explanation

The calculation is the amount to be deposited today, the present value, of six equal payments (an annuity), that doesn’t start for two years (deferred annuity).

U. B. Wong plans to make quarterly deposits of $200 for five years into a savings account. The deposits will be made at the end of each quarter. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Wong have accumulated in the savings account at the end of the five-year period? Round to the nearest dollar.

Future value of an ordinary annuity of $1 at 8% for five periods  5.8666

  Future value of an annuity due of $1 at 8% for five periods  6.3359

  Future value of an ordinary annuity of $1 at 2% for 20 periods   24.2974

  Future value of an annuity due of $1 at 2% for 20 periods  24.7833

• 2,672

• 4,000

• 5,237

• 4,859

Answer explanation

$200 × 24.2974* = $4,859

     *Future value of an ordinary annuity for 20 periods at 2%

I. R. Wright plans to make quarterly deposits of $200 for five years into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Wright have accumulated in the savings account at the end of the five-year period? Round to the nearest dollar.

Future value of an ordinary annuity of $1 at 8% for five periods  6.3359

  Future value of an annuity due of $1 at 8% for five periods  5.8666

  Future value of an ordinary annuity of $1 at 2% for 20 periods   24.2974

  Future value of an annuity due of $1 at 2% for 20 periods  24.7833

• 2,672

• 4,000

• 4,957

• 5,237

Answer explanation

$200 × 24.7833* = $4,957

     *Future value of an annuity due for 20 periods at 2%