Accounting 101 Appendix TVM 1) Using the tables, which of the following is not used in computing the present value of an annuity'? a) The amount of each periodic payment. b) The total of all the payments c) The interest rate d) The number of compounding periods e) Present value of an annuity factor 2) $25,000 is put in a savings account paying interest of 4% compounded annually. To calculate the balance in the account at the end of 5 years, you would use which table: a) Present Value of 1 b) Present Value of an annuity c) Future Value of 1 d) e) Future Value of an annuity All of the above Which is true about a $1,000 ten year bond that pays 8% semiannually? 3) It would sell for more if it were annual a) b) d) Unless the issuer defaults (doesn't pay) buyers could risk losing interest, but the value cannot drop below $1,000 If market interest rates drop to 6% the value of the bond should increase The price goes down over time since fewer interest payments remain. c) If market interest rates drop to 6% the e) payments would be $30 twice per year Compare the above bond to a $1,000 twenty year bond that pays 8% semiannually? The 20 yr bond 4) a) b) should always be worth more d) e) has a lower present value if rates has a higher present value if rates 8%. 8%. should always be worth less c) is more volatile (changes more in value) with changes in market interest rates Dick and Jane Smith invested $10,000 in a savings account paying 5% annual interest when their son, Jason, was born. They also deposited $500 on each of his birthdays until he was 20 (including his 20th birthday). To the closest dollar, how much was in the savings account on his 20th birthday (after the last deposit)? a) $43,066 b) $53,066 5) c) $30,000 d) $26,533 Which of the following is true about bonds? a) 6) Bonds are a safe investment because you cannot lose principal When market interest rates increase, the periodic interest payment increases b) The best time to buy bonds would be when you think interest rates are about to increase c) The current value depends on the face amount, the number of future payments, the market d) interest rate, but not the stated interest rate All of the above statements are false. e) Suppose you have a winning ticket for a $1,000,000 CA lottery. It pays 5 payments of $200,000 per year payments today based on a 5% a) $552,563 b) $783,530 c) $865,896. 7) starting in one year from today, or you may take a lump sum equal to the present value of the 5 iscount rate. If you elect to receive the cash now, you will receive d) $950,000 e) $1,000,000 Consider the question above. If interest rates had been higher, and you elect to receive the cash n you would receive a) less b) more c) the same ow 8) Can't be determined from the information given d) Rogers Company is considering purchasing equipment. It will produce the following cash flows 9) Year 1 Year 2 $20,000 $30,000 To earn a minimum rate of return of 10%, Rogers cannot buy this equipment unless the price is or lower a) $42,975.30 b) $21,487.65. c) $50,000.00. d) $45,454.54 10) Holland Co. purchased equipment that requires annual payments of $25,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%, what amount will be used to record the purchase price of the equipment? a) $150,000.00. b) $138,143.40. c) $102,785.25. d) $96,374.50. BONUS QUESTION: Jenny Carson invested $12,000 at 8% annual interest compounded annually and left the money invested without withdrawing anything for 15 years. She looked in the four tables and, using 8% and 15 periods, she found the following four factors (in no particular order). Which factor would Jenny use to compute the amount she will have in the account? a) 27.15211 b) 8.55948. c) 3.17217 d) 0.31524