TEST BANK FINANCIAL ACCOUNTING INFORMATION FOR DECISIONS 7TH EDITION WILD TBAppB

A company can use present and future value computations to estimate the interest component of holding assets over time... Topic: Present Value Topic: Future Value [Question] 9.. This is

Appendix B Applying Present and Future Values

These abbreviated tables can be used with the test questions that are tagged: Factor

Future Value of an Annuity of 1

3 An interest rate is also called a discount rate

4 A company can use present and future value computations to estimate the interest component

of holding assets over time

Blooms Taxonomy: Apply

7 The present value of 1 formula is often useful when a borrowed asset must be repaid in full at

a later date and the borrower wants to know its worth at the future date

Topic: Present Value

Topic: Future Value

[Question]

9 The present value of $2,000 to be received nine years from today at 8% interest compounded annually is $1,000 (rounded to full dollar amount)

Answer: TRUE

Feedback: $28,225/$50,000 = 0.5645 This is the present value of 1 factor, 10%, 6 periods.

Blooms Taxonomy: Apply

12 The number of periods in a future value calculation can only be expressed in years

Feedback: $7,210.65/$5,300 = 1.3605 This is the future value of 1 factor for four periods, 8%.

Blooms Taxonomy: Remember

Topic: Ordinary Annuity

Multiple Choice Questions

[Question]

21 Interest is:

A Time

B A borrower's payment to the owner of an asset for its use

C The same as a savings account

22 Which interest rate column would you use to determine the factor from a present value table

or a future value table for 8% compounded quarterly?

Topic: Present Value

Topic: Future Value

Topic: Interest

[Question]

23 A company is considering investing in a project that is expected to return $350,000 four yearsfrom now How much is the company willing to pay for this investment if the company requires

$15,529 at the end of the investment period How many years will elapse before the company accumulates the $15,529?

Present value of 1 factor of 0.3220 relates to 12%, 10 periods

Blooms Taxonomy: Apply

Topic: Present Value

Topic: Future Value

Topic: Future Value

Feedback: $35,462.50/$25,000 = 1.4185, the future value of 1 factor at 6% for six periods

Blooms Taxonomy: Apply

Feedback: $6802.50/$5,000 = 1.3605, the future value of 1 factor at 8% for four periods

Blooms Taxonomy: Apply

$25,000/$6,595 = 3.7908, the present value of an annuity of 1 factor at 10% for five periods

Blooms Taxonomy: Apply

Topic: Annuity

[Question]

31 A company is considering an investment that will return $20,000 at the end of each

semiannual period for four years If the company requires an annual return of 10%, what is the maximum amount it is willing to pay for this investment?

A Not more than $63,398

B Not more than $126,796

C Not more than $80,000

D Not more than $129,264

E Not more than $160,000

Topic: Present Value

[Question]

33 An individual is planning to set-up an education fund for her children She plans to invest

$10,000 annually at the end of each year She expects to withdraw money from the fund at the end of 10 years and expects to earn an annual return of 8% What will be the total value of the fund at the end of 10 years?

34.Chad is setting up a retirement fund, and he plans on depositing $5,000 per year in an

investment that will pay 7% annual interest How long will it take him to reach his retirement goal of $69,080?

Feedback: $69,080/$5,000 = 13.816, the future value of an annuity of 1 factor at 7%, 10 periods

Blooms Taxonomy: Apply

Interest represents a borrower's payment to the owner of an asset in exchange for its use

Blooms Taxonomy: Remember

The future value of a single amount is equal to the amount that would accumulate at a future date

at a specified rate of interest

Blooms Taxonomy: Remember

Short Answer Questions

[Question]

40 A company needs to have $200,000 in four years, and will create a fund to ensure that the

$200,000 will be available If they can earn a 7% return, how much must the company invest in the fund today to equal the $200,000 at the end of four years?

41 Annette has a loan that requires a $25,000 payment at the end of three years The interest rate

on the loan is 5%, compounded annually How much did Annette borrow today?

42 Thompson Company has acquired a machine from a dealer which requires a payment of

$45,000 at the end of five years This transaction includes interest at 8%, compounded

semiannually What is the value of the machine today?

Answer: $45,000 x 0.6756 = $30,402

Blooms Taxonomy: Apply

This is the future value of 1 factor for 8 periods at 4%

Blooms Taxonomy: Apply

Topic: Present Value

Topic: Future Value

[Question]

44 A company is setting aside $21,354 today and wishes to have $30,000 at the end of three years for a down payment on a piece of property What interest rate must the company earn? Answer: $21,354/$30,000 = 0.7118

This is the present value of 1 factor for three periods at 12% This implies the company must earn 12%

Alternatively: $30,000/$21,354 = 1.4049 This is the future value of 1 factor for three periods at 12%.

Blooms Taxonomy: Apply

Topic: Present Value

Topic: Future Value

46.Troy has $105,000 now He has a loan of $175,000 that he must pay at the end of five years

He can invest his $105,000 at 10% interest compounded semiannually Will Troy have enough topay his loan at the end of the five years?

Answer: $105,000 x 1.6289 = $171,034.50

No, Troy will be $3,965.50 short of his goal of $175,000

Blooms Taxonomy: Apply

Future value of $20,000 deposit $20,000 x 1.6105 = $32,210

Future value of $5,000 payments $5,000 x 4.6410 = 23,205

48 A company borrows money from the bank by promising to make six annual year-end

payments of $25,000 each How much is the company able to borrow if the interest rate is 9%? Answer: $25,000 x 4.4859 = $112,147.50

Blooms Taxonomy: Apply

49 A company borrows money from the bank by promising to make eight semiannual payments

of $9,000 each How much is the company able to borrow if the interest rate is 10% compoundedannually?

Answer: Nine years

Feedback: $100,000/$14,702 = 6.8017, the present value of 1 annuity factor at 6% for nine periods

Blooms Taxonomy: Apply

51 Big League Sports borrowed $883,212 and must make annual year-end payments of

$120,000 each If the applicable interest rate is 6%, how many years will it take Big League Sports to pay off the loan?

Answer: $524,210/$100,000 = 5.2421

This is the present value of an annuity factor for 6 periods at 4%

Davis is paying a 4% semiannual rate, or 8% annual rate of interest

Blooms Taxonomy: Apply

53 A company is beginning a savings plan It will save $15,000 per year for the next 10 years How much will the company have accumulated after the tenth year-end deposit, assuming the fund earns 10% interest?

Answer: interest rate (i); number of time periods (n)

Blooms Taxonomy: Understand

AACSB: Analytic

AACSB: Communications

AICPA BB: Critical Thinking

AICPA BB: Industry