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Exam 13: Time Value of Money

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Question 21

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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.Assuming an 8% discount rate,calculate the present value of the cash savings.

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Question 22

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Monica wants to sell her share of an investment to Barney for $50,000 in three years.If money is worth 6% compounded semiannually,what would Monica accept today?

A) $8,375.
B) $41,874.
C) $11,941.
D) $41,000.

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

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Question 23

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The value that a series of payments will grow to in the future is referred to as the:

Shane wants to invest money in a 6% CD 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?

What is the value today of receiving $2,500 at the end of three years,assuming an interest rate of 9% compounded annually?

George Jones is planning on a cruise for his 70^th birthday party.He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years.He should use a table for the:

Briefly describe the difference between simple interest and compound interest.

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 at the end of the first year.The value of this signing bonus is:

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms.Match each phrase with the best term placing the letter designating the term in the space provided.

What is the relationship between the present value of a single amount and the present value of an annuity?

Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate.He should use a table for the:

Samson Inc.is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years.Assuming a 10% discount rate,calculate the present value of the cash savings.

LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years.She should use a table for the:

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.The discount rate is 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.Determine if Dobson should purchase the machine.

Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.

Future value is how much an amount today will grow to be in the future.

Explain the difference between present value and future value.

Compound interest is interest you earn on the initial investment and on previous interest.

The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period. The three-year annuity represents three payments of $500 (= $1,500),so the present value of the annuity is greater.

Below are excerpts from interest tables for 8% interest. $\begin{array} { c c c c c } & \underline { 1 } & \underline { 2 } & \underline { 3 } & \underline { 4 } \\1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \\2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \\3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \\4 & 4.5061 & 0.73503 & 1.36049 & 3.31213\end{array}$ Column 3 is an interest table for the: