Accounting Appendix C 2 The more frequent the rate of compounding, the more interest that is earned on previous interest, resulting in a higher future value

45. If you put $200 into a savings account that pays annual compound interest of 8% per year

and then withdraw the money two years later, you will earn interest of $32.

46. If you put $300 into a savings account that pays annual compound interest of 10% per

year and then withdraw the money two years later, you will earn interest of $63.

47. Future value is how much an amount today will grow to be in the future.

48. The more frequent the rate of compounding, the more interest that is earned on previous

interest, resulting in a higher future value.

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

50. The discount rate is the rate at which someone is willing to give up current dollars for

future dollars.

51. An annuity is a series of equal cash payments over equal time intervals.

52. The future value of $1,000 invested today for three years that earns 10% compounded

annually is greater than the future value of a $500 annuity with the same interest rate over the

same period.

53. The present value of $1,000 received three years from today with a discount rate of 10% is

less than the present value of a $500 annuity with the same discount rate over the same

period.

54. Listed below are ten terms followed by a list of phrases that describe or characterize five

of the terms. Match each phrase with the best term placing the letter designating the term in

the space provided.

Terms:

a. Annuity

b. Future value of a single amount

c. Discount rate

d. Future value of an annuity

e. Present value of a single amount

f. Compound interest

g. Present value of a single amount

h. Time value of money

i. Simple interest

j. Present value of an annuity

Phrases:

_____ A dollar now is worth more than a dollar later.

_____ A series of equal periodic payments.

_____ Accumulation of a series of equal payments.

_____ Interest earned on the initial investment and on previous interest.

_____ Accumulation of an amount with interest.

55. Listed below are ten terms followed by a list of phrases that describe or characterize five

of the terms. Match each phrase with the best term placing the letter designating the term in

the space provided.

Terms:

a. Annuity

b. Future value of a single amount

c. Discount rate

d. Future value of an annuity

e. Interest

f. Compound interest

g. Present value of a single amount

h. Time value of money

i. Simple interest

j. Present value of an annuity

Phrases:

_____ Amount today equivalent to a specified future amount.

_____ The rate at which future dollars are equal to current dollars.

_____ Interest earned on the initial investment only.

_____ The factor that causes money today to be worth more than the same amount in the

future.

_____ Current worth of a series of equal payments received in the future.

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

interest rates.

57. Anthony would like to have $18,000 to buy a new car in three years. Currently, he has

saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually,

will he be able to buy the car in three years?

58. 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?

59. Compute the present value of the following single amounts to be received at the end of the

specified period at the given interest rate.

60. Compute the present value of the following single amounts to be received at the end of the

specified period at the given interest rate.

61. If you had an investment opportunity that promises to pay you $20,000 in three years and

you could earn a 10% annual return investing your money elsewhere, what is the most you

should be willing to invest today in this opportunity?

62. 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.

63. 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.

64. 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.

65. DON Corp. is contemplating the purchase of a machine that will produce net after-tax

cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold

to realize after-tax cash flows of $5,000. Assuming a 12% discount rate, calculate the total

present value of the cash savings.

66. 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.

67. Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment

is expected to generate cash flows of $15,000 per year for eight years and can be sold at the

end of eight years for $5,000. The discount rate is 12%. Assume the equipment 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 Dobson should purchase the machine.

68. 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.

69. 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.

be.

70. Briefly explain why the value of $100 received today is greater than the value of $100

received one year from now.

71. Briefly describe the difference between simple interest and compound interest.

72. Two banks each have stated CD rates of 12%. Bank A compounds quarterly and Bank B

compounds semiannually. Explain which bank offers the better CD.

73. Explain the difference between present value and future value.

74. Which three factors are necessary in calculating the present value of a single amount?

75. What is the relationship between the present value of a single amount and the present

value of an annuity?

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