Time Value of Money Module Key
1. The method of converting a future dollar amount into its present dollar value by removing the time value of
money is called
2. Interest calculated on the original principal regardless of the number of time periods that have passed or the
amount of interest that has been paid or accrued in the past is
3. Compound interest is
4. To compare the value of amounts received at different times in the future, dollar amounts
5. Simple interest on a $20,000, 8%, 15-month note payable would total
6. Interest compounded on a $10,000 principal amount monthly at 18% for two years is
7. The formula for the future value of a single amount at compound interest is
8. The future amount of $6,000 deposited today and compounded semiannually at an 8% annual interest rate for
four years would be
9. Milton desires to have $6,442 on deposit five years from today. If he has $4,000 to deposit, what rate of
interest, compounded annually, must be obtained to accumulate the desired $6,442 in five years?
10. If $10,000 is invested on December 31, 2008, to earn compound interest semiannually, and if the future
value on December 31, 2018, is $38,697, what is the semiannual interest rate on the investment?
11. On April 1, 2010, the Resendez Company purchased a bulldozer. Payment, totaling $70,000, is not due until
April 1, 2012. Assuming interest at a 12% annual rate, Resendez should debit Machinery on April 1, 2010, in
the amount of
12. Molly will receive an insurance settlement of $2,000,000 in six years. Randal is willing to give her a lump
sum today in return for the payment in six years. If current interest rates are 12% per year, how much will
Molly receive today?
13. Each of the following compound interest factors has the same number of time periods and/or rents (n) at the
same interest rate (i). Which one is the table factor for the present value of a single sum?
14. Table factors for present values
15. The present value of $75,000 received at the end of eight years discounted at 12% is
16. The formula for the present value of a single sum at compound interest is
17. All of the following are conditions for an annuity except
18. An annuity is a
19. Lori Miller deposits $2,000 each year into a savings account beginning January 1, 2010. The last payment
will be made on January 1, 2019, after which the total amount will be withdrawn to purchase a yacht. To find
20. Kevin Nathan will deposit $1,000 into a special account each year beginning December 31, 2010, with the
last deposit being made on December 31, 2014. Kevin wants to know how much will be in his account on
December 31, 2014, immediately after the final deposit, if the account earns 12% compounded annually. To
solve the problem, Kevin must find the
21. On January 2, 2010, Claudia Company inherited a trust fund that she could use for college tuition. Claudia
hopes to make five equal withdrawals of $40,000 from the fund that will earn 10% compounded annually. The
first withdrawal will be made on January 2, 2011. How much does she need to have invested in the fund on
January 2, 2010, to be able to withdraw the needed amounts each year?
22. Abby wants to have $20,000 available in August 2015 to make a college tuition payment. To be able to have
this amount available, Abby will have to make equal annual deposits in an investment earning 12% annually in
August 2011, 2012, 2013, 2014, and 2015 in the amount of
23. Nancy’s parents loaned her $80,000 to fund her college education. Her parents are not charging interest.
They desire to be paid in one lump sum of $80,000 when Nancy can accumulate that amount. Nancy established
a savings plan that earns 8% compounded annually. Her new job promises to pay an annual holiday bonus that
will enable her to make equal annual, year-end deposits of $6,400. Approximately how many years will it take
Mary to accumulate the desired $80,000?
24. John desires to accumulate $13,603.83 by December 1, 2012. To accumulate that sum, he will make six
equal semiannual deposits of $2,000, beginning on June 1, 2010, into a fund that earns interest compounded
semiannually. What annual rate of interest must the fund provide to yield the desired sum?
25. The formula for the future value of an ordinary annuity is
26. Glenda deposits $4,000 every three months for five years. The first deposit is made on March 31, 2010, and
the last deposit is made on December 31, 2014. The fund earns 16%, and interest is compounded quarterly.
How much money will Glenda have on December 31, 2014, immediately after her last deposit? Factors for
future value of an annuity of $1 are
For Values of n and i
n = 5; i = 16%
n = 20;I = 4%
6.8771
29.7781
27. Using the table approach, the future amount of an annuity due may be calculated by finding the table factor
for the future amount of an ordinary annuity of
28. At the beginning of 2011, the Loretta Company issued 10-year bonds with a face value of $4,000,000 due
on December 31, 2020. The company will accumulate a fund to retire these bonds at maturity. It will make ten
annual deposits to the fund beginning on December 31, 2011. How much must the company deposit each year,
assuming that it will earn 12% interest compounded annually?
29. The future amount of an annuity due is determined one period
30. Sol’s Laundry began depositing $1,000 equal annual deposits in a fund beginning on January 2, 2010. The
fund earns 10% compounded annually, and the last deposit is made on January 2, 2014. How much will be in
the fund on January 2, 2015, one year after the final deposit?
31. Hillary Jones wants to know how much she must deposit today at 12% interest to provide three equal annual
withdrawals of $10,000, beginning one year from now. This is an example of the present value of
32. Georgia has just won the state lottery. She will receive six equal annual amounts of $12,000, beginning one
year from today. Assuming an 8% interest rate compounded annually, the present value of those receipts today
is
33. You would like to deposit a sum of money today that would enable you to withdraw $1,000 a year for five
years. If the interest paid on the amount deposited is 10% compounded annually and if the first withdrawal is
made one year from today, the formula you would use to determine the amount of the initial deposit is
34. In order to measure the carrying value of investments in bonds, which of the following time value of money
concepts is used?
35. What is the formula for the present value of an ordinary annuity of 1?
37. In the present value of an annuity table, the factors
38. On January 31, 2010, Richie Company acquired a new machine by paying $40,000 cash and agreeing to pay
$20,000 annually for three years, beginning on January 31, 2011. Assuming an interest rate of 10%, Richie
should record the acquisition cost of the machine on January 31, 2010, at
39. Paul’s Painting Co. acquired a new $800,000 press on April 1, 2010. Paul’s will make six equal payments
based upon 8% compound interest, starting on March 31, 2011. How much will each payment be?
40. Millie Company borrowed $550,000 on December 31, 2010. The loan will be paid with six equal annual
payments of $115,388, beginning on December 31, 2011. The rate of interest compounded annually for the loan
is
41. To determine the converted table factor for the present value of an annuity due, one must find the factor for
the present value of an ordinary annuity for
42. On July 7, 2010, Luke Company sold some machinery to Jones Construction Company. The sales contract
requires Jones to pay five equal annual payments of $70,000 each, beginning on July 7, 2010. What present
value concept is appropriate for this situation?
43. Which of the following transactions would require the use of the present value of an annuity due concept in
order to calculate the present value of an asset acquired or liability assumed?
44. Sally has $3,000,000 on deposit in a fund that earns 10% interest compounded annually. How much can
Sally withdraw annually from the fund in ten equal annual withdrawals to completely deplete the fund after the
tenth draw, assuming the first withdrawal occurs one year from today?
45. Sammy has just inherited an annuity. He will receive six equal annual amounts of $8,000, beginning today.
Assuming a 12% interest rate compounded annually, the present value today of all receipts is
46. On May 1, 2010, Mosier Company acquired a new machine by agreeing to pay five equal annual payments
of $20,000, beginning on May 1, 2010. Assuming an interest rate of 14% compounded annually, Mosier should
record the acquisition cost of the machine on May 1, 2010, at
47. Nola has $1,000,000 in her retirement account. She wants to make 20 equal withdrawals, beginning
immediately. The investment plan earns 6%. How much should each withdrawal be?
48. The Rogers Leasing Company signed an agreement to lease an asset that has a fair value of $800,000 on
December 31, 2010. The lease will be paid in seven equal annual payments of $138,730, beginning on
December 31, 2010. The interest rate included in the lease agreement is
49. The formula for the present value of an annuity due is
50. Rose Carter wants to determine how much she must deposit today at 14% interest to provide four
withdrawals of $6,000 at the end of each year, beginning five years from now. This is an example of the present
value of a(n)
51. When the present value of an annuity is calculated as of two or more periods before the payment of the first
rent, the annuity is a(n)
52. Joseph desires to purchase an annuity on January 1, 2010, that yields him five annual rents of $10,000 each,
with the first rent to be received on January 1, 2013. The interest rate is 10% compounded annually. The cost
(present value) of the annuity on January 1, 2010, is
53. Balance sheet values are calculated using compound interest (present value) calculations for all of the
following except
54. FASB financial accounting concepts on using estimated future cash flow information in accounting
measurements identified each of the following four principles except
55. Using the compound interest tables, solve each of the following questions.
Required: