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Exam 13: Time Value of Money

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Question 31

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The concept that interest causes the value of money received today to be greater than the value of that same amount of money received in the future is referred to as the:

A) Monetary unit assumption.
B) Historical cost principle.
C) Time value of money.
D) Matching principle.

E) None of the above
F) All of the above

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Question 32

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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 4 is an interest table for the:

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

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

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Question 33

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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.

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. Assuming a 12% discount rate, calculate the total present value of the cash flows.

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:

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

The value today of receiving an amount in the future is referred to as the:

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

Present value indicates how much a present amount of money will grow to in the future.

A series of equal periodic payments is referred to as:

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?

Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. The discount rate is 10%. Assume the machine 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 Baird should purchase the machine.

The value of $1 today is worth more than $1 one year from now.

Reba wishes to know how much would be in her savings account in five years if she deposits a given sum in an account that earns 6% interest. She should use a table for the:

What is the value today of receiving $5,000 at the end of each year for the next 10 years, assuming an interest rate of 12% compounded annually?

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?

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

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:

Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved $8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years?

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.