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Exam 6: Time Value of Money Concepts

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Question 61

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Hillsdale is considering two options for comparable computer software.Option A will cost $25,000 plus annual license renewals of $1,000 for three years,which includes technical support.Option B will cost $20,000 with technical support being an add-on charge.The estimated cost of technical support is $4,000 the first year,$3,000 the second year,and $2,000 the third year.Assume the software is purchased and paid for at the beginning of year one,but that technical support is paid for at the end of each year.Interest is at 8%.Ignore income taxes. Required: Determine which option should be chosen based on present value considerations.

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Option A should be...

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Question 62

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Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -On January 1,2016,you are considering making an investment that will pay three annual payments of $10,000.The first payment is not expected until December 31,2019.You are eager to earn 3%.What is the present value of the investment on January 1,2016?

A) $28,286.
B) $25,886.
C) $26,662.
D) $27,300.

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

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Question 63

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Two banks each have annual CD rates of 12%.Bank A compounds quarterly and Bank B compounds semiannually.Explain which bank offers the better CD.

On January 1,2016,Glanville Company sold goods to Otter Corporation.Otter signed an installment note requiring payment of $15,000 annually for six years.The first payment was made on January 1,2016.The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2016 of:

Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years.The interest rate implicit in the purchase contract is 11%.Polo would record the asset at:

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

With an annuity due,a payment is made or received on the date the agreement begins.

Davenport Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $30,000 at the date of employment and another $50,000 two years later.Assuming the employee's time value of money is 8% annually,what lump sum at employment date would make her indifferent between the two options?

Explain how you would compute the imputed interest on cash borrowed at 0% interest when the market rate of interest is 8%.