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Exam 13: Time Value of Money

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Question 31

Multiple Choice

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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:

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 C)
F) A) and B)

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Question 32

Multiple Choice

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At the end of the next four years,a new machine is expected to generate net cash flows of $8,000,$12,000,$10,000,and $15,000,respectively.What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

A) $41,557.
B) $47,700.
C) $32,403.
D) $38,108.

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

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Question 33

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If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the money two years later,you will earn interest of $126.

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:

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.

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.The discount rate is 8%.Ignore income taxes.Determine which option should be chosen based on present value considerations.

Below are excerpts from interest tables for 8% interest. Column 2 is an interest table for the:

If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the money two years later,you will earn interest of $80.

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

Below are excerpts from interest tables for 8% interest. Column 3 is an interest table for the:

Briefly describe the difference between simple interest and compound interest.

What is the value today of receiving $5,000 at the end of six years,assuming an interest rate of 8% compounded semiannually?

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.

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?

How much will $5,000 invested at the end of each year grow to in six years,assuming an interest rate of 7% compounded annually?

Touche Manufacturing is considering a rearrangement of its manufacturing operations.A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year,$10,000 for the next two years,and $12,000 for the next two years.Assuming a 12% discount rate,calculate the total present value of the cash flows.

Carol wants to invest money in a 6% CD 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?

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

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments,which will be made at the end of the month,with interest of 12% on the unpaid balance.She should use a table for the:

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