FOR INSTRUCTOR USE ONLY
APPENDIX D
TIME VALUE OF MONEY
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S
TAXONOMY
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
True-False Statements
1.
1
K
5.
2
K
9.
4
K
13.
6
K
17.
7
K
2.
1
K
6.
2
K
10.
4
K
14.
6
K
18.
7
C
3.
1
K
7.
3
K
11.
5
K
15.
6
K
19.
7
K
4.
1
K
8.
3
K
12.
5
K
16.
6
K
20.
7
K
Multiple Choice Questions
21.
1
K
33.
3
AP
45.
5
AP
57.
5
AP
69.
6
AP
22.
1
K
34.
3
AP
46.
5
AP
58.
5
AP
70.
7
AP
23.
1
AP
35.
3
K
47.
5
K
59.
5
AP
71.
7
AP
24.
1
C
36.
3
AP
48.
5
AP
60.
5
AP
72.
7
K
25.
2
AP
37.
3
C
49.
5
AP
61.
6
AP
73.
7
K
26.
2
AP
38.
3
AP
50.
5
AP
62.
6
AP
74.
7
K
27.
2,3
AP
39.
3
K
51.
5
C
63.
6
AP
75.
7
K
28.
2
K
40.
4
K
52.
5
AP
64.
6
AP
76.
7
AP
29.
2
AP
41.
4
K
53.
5
AP
65.
6
K
77.
7
AP
30.
2
K
42.
4
K
54.
5
AP
66.
7
AP
78.
7
AP
31.
2
K
43.
5
AP
55.
5
AP
67.
6
AP
79.
7
AP
32.
2
AP
44.
5
AP
56.
5
AP
68.
6
AP
80.
2
AP
84.
3
AP
88.
5
AP
92.
6,7
AP
96.
7
AP
81.
2
AP
85.
3
AP
89.
5
AP
93.
6,7
AP
97.
7
AP
82.
2,3
AP
86.
5
AP
90.
6
AP
94.
7
AP
83.
2,3
AP
87.
5
AP
91.
6
AP
95.
7
AP
Completion Statements
98.
1
K
100.
3
K
102.
4
K
104.
6
K
99.
2
K
101.
3
K
103.
5
K
105.
7
K
Matching
106.
1-6
K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1.
TF
3.
TF
21.
MC
23.
MC
98.
C
2.
TF
4.
TF
22.
MC
24.
MC
Learning Objective 2
5.
TF
26.
MC
29.
MC
32.
MC
82.
Be
99.
C
6.
TF
27.
MC
30.
MC
80.
Be
83.
Be
25.
MC
28.
MC
31.
MC
81.
Be
Learning Objective 3
7.
TF
33.
MC
36.
MC
39.
MC
84.
Be
101.
C
8.
TF
34.
MC
37.
MC
82.
Be
85.
Be
27.
MC
35.
MC
38.
MC
83.
Be
100.
C
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
D – 2
Learning Objective 4
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
9.
TF
10.
TF
40.
MC
41.
MC
42.
MC
102.
C
Learning Objective 5
11.
TF
46.
MC
51.
MC
56.
MC
86.
Be
12.
TF
47.
MC
52.
MC
57.
MC
87.
Be
43.
MC
48.
MC
53.
MC
58.
MC
88.
Be
44.
MC
49.
MC
54.
MC
59.
MC
89.
Be
45.
MC
50.
MC
55.
MC
60.
MC
103.
C
Learning Objective 6
13.
TF
16.
TF
63.
MC
66.
MC
69.
MC
92.
Be
14.
TF
61.
MC
64.
MC
67.
MC
90.
Be
93.
Be
15.
TF
62.
MC
65.
MC
68.
MC
91.
Be
Learning Objective 7
17.
TF
70.
MC
74.
MC
78.
MC
96.
Be
18.
TF
71.
MC
75.
MC
79.
MC
97.
Be
19.
TF
72.
MC
76.
MC
94.
Be
105.
C
20.
TF
73.
MC
77.
MC
95.
Be
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching
CHAPTER LEARNING OBJECTIVES
1. Distinguish between simple and compound interest. Simple interest is computed on the
principal only while compound interest is computed on the principal and any interest earned
that has not been withdrawn.
2. Solve for future value of a single amount. Prepare a time diagram of the problem. Identify
the principal amount, the number of compounding periods, and the interest rate. Using the
future value of 1 table, multiply the principal amount by the future value factor specified at the
intersection of the number of periods and the interest rate.
3. Solve for future value of an annuity. Prepare a time diagram of the problem. Identify the
amount of the periodic payments, the number of compounding periods, and the interest rate.
Using the future value of an annuity of 1 table, multiply the amount of the payments by the
future value factor specified at the intersection of the number of periods and the interest rate.
4. Identify the variables fundamental to solving present value problems. The following
three variables are fundamental to solving present value problems: (1) the future amount, (2)
the number of periods, and (3) the interest rate (the discount rate).
5. Solve for present value of a single amount. Prepare a time diagram of the problem.
Identify the future amount, the number of discounting periods, and the discount (interest) rate.
Using the present value of a single amount table, multiply the future amount by the present
value factor specified at the intersection of the number of periods and the discount rate.
Time Value of Money
D – 3
6. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the
amount of future periodic receipts or payment (annuities), the number of discounting periods,
and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the
amount of the annuity by the present value factor specified at the intersection of the number
of periods and the interest rate.
7. Compute the present value of notes and bonds. Determine the present value of the
principal amount: Multiply the principal amount (a single future amount) by the present value
factor (from the present value of 1 table) intersecting at the number of periods (number of
interest payments) and the discount rate. Determine the present value of the series of interest
payments: Multiply the amount of the interest payment by the present value factor (from the
present value of an annuity of 1 table) intersecting at the number of periods (number of
interest payments) and the discount rate. Add the present value of the principal amount to the
present value of the interest payments to arrive at the present value of the note or bond.
TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.
2. Compound interest is computed on the principal and any interest earned that has not
been withdrawn.
3. The amount of interest involved in any financing transaction is based on two elements,
principal and interest rate.
4. Compound interest uses the accumulated balance—principal plus interest to date—at
each year-end to compute interest in the succeeding year.
6. The future value of a single amount is the value at a future date of a given amount
invested assuming compound interest.
7. When the periodic payments are not equal in each period, the future value can be
computed by using a future value of an annuity of 1 table.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D – 4
8. In computing the future value of an annuity, it is necessary to know the interest rate, the
number of compounding periods, and the amount of the periodic payments or receipts.
9. The present value is based on two variables—the dollar amount to be received and the
length of time until the amount is received.
10. The process of determining the present value is referred to as discounting the future
amount.
11. A higher discount rate produces a higher present value.
12. The formula for the present value of a single amount is FV / (1 + i)N.
13. In computing the present value of an annuity, it is necessary to know only the discount
rate and the amount of the periodic receipts or payments.
14. A series of equal periodic receipts or payments are called annuities.
15. In computing the present value of an annuity, it is not necessary to know the number of
discount periods.
16. Discounting may be done on an annual basis or over shorter periods of time such as
semiannually.
17. The present value of a bond is a function of two variables: (1) the payment amounts and
(2) the discount rate.
18. When the discount rate is equal to the contractual rate, the present value of the bonds will
equal the bonds’ face value.
19. The present value of a long-term note is based on the payment amounts, the length of
time until the amounts are paid, and the discount rate.
Time Value of Money
D – 5
20. To compute the present value of a bond, both the interest payments and the principal
amount must be discounted using the bond’s contractual interest rate.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
Note: Students will need time value of money tables for some questions.
21. Compound interest is the return on principal
a. only.
b. for one or more periods.
c. for two or more periods.
d. for one period.
22. The difference between the amount borrowed (or invested) and the amount repaid (or
collected) is commonly known as
a. simple interest.
b. an annuity.
c. interest
d. present value.
23. Ken Corsig invested $20,000 at 8% annual interest and left the money invested without
withdrawing any of the interest for 15 years. At the end of the 15 years, Ken withdrew the
accumulated amount of money. What amount did Ken withdraw, assuming the investment
earns simple interest?
a. $25,600
b. $44,000
c. $30,000
d. $24,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D – 6
24. Parks Blair invested $5,000 at 8% annual interest and left the money invested without
withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to
withdraw the accumulated amount of money. Parks has found the following values in
various tables related to the time value of money.
Present value of 1 for 15 periods at 8% 0.31524
Future value of 1 for 15 periods at 8% 3.17217
Present value of an annuity of 1 for 15 periods at 8% 8.55948
Future value of an annuity of 1 for 15 periods at 8% 27.15211
Which factor would he use to compute the amount he would withdraw, assuming that the
investment earns interest compounded annually?
a. 0.31524
b. 3.17217
c. 8.55948
d. 27.15211
25. Parks Blair invested $5,000 at 8% annual interest and left the money invested without
withdrawing any of the interest for 15 years. At the end of the 15 years, Parks decided to
withdraw the accumulated amount of money. Parks has found the following values in
various tables related to the time value of money.
Present value of 1 for 15 periods at 8% 0.31524
Future value of 1 for 15 periods at 8% 3.17217
Present value of an annuity of 1 for 15 periods at 8% 8.55948
Future value of an annuity of 1 for 15 periods at 8% 27.15211
To the closest dollar, which amount would he withdraw, assuming that the investment
earns interest compounded annually?
a. $42,797
b. $75,000
c. $1,576
d. $15,861
26. Brenda Draper borrowed $120,000 on June 1, 2013. This amount plus accrued interest at
8% compounded annually is to be repaid on June 1, 2026. Brenda has obtained the
following values related to the time value of money to help her with her financing process
and compounded interest decisions.
Present value of 1 for 13 periods at 8% 0.36770
Future value of 1 for 13 periods at 8% 2.71962
Present value of an annuity of 1 for 13 periods at 8% 7.90378
Future value of an annuity of 1 for 13 periods at 8% 21.49530
To the closest dollar, how much will Brenda have to repay on June 1, 2026?
a. $44,124
b. $948,454
c. $261,554
d. $326,354
Time Value of Money
D – 7
27. Jim and Aneta O’Connor invested $12,000 in a savings account paying 5% annual
interest when their son, Austin, was born. They also deposited $500 on each of his
birthdays until he was 20 (including his 20th birthday). Jim and Aneta have obtained the
following values related to the time value of money to help them with their planning
process for their compounded interest decisions.
Present value of 1 for 20 periods at 5% 0.37689
Future value of 1 for 20 periods at 5% 2.65330
Present value of an annuity of 1 for 20 periods at 5% 12.46221
Future value of an annuity of 1 for 20 periods at 5% 33.06595
To the closest dollar, how much was in the savings account on his 20th birthday (after the
last deposit)?
a. $33,166
b. $48,373
c. $22,000
d. $28,533
28. The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table.
From what table is this factor taken?
a. Future value of 1
b. Future value of an annuity of 1
c. Present value of 1
d. Present value of an annuity of 1
29. If $30,000 is put in a savings account paying interest of 4% compounded annually, what
amount will be in the account at the end of 5 years?
a. $25,644
b. $36,000
c. $35,096
d. $36,500
30. The future value of 1 factor will always be
a. equal to 1.
b. greater than 1.
c. less than 1.
d. equal to the interest rate.
31. All of the following are necessary to compute the future value of a single amount except
the
a. interest rate.
b. number of periods.
c. principal.
d. maturity value.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D – 8
32. If $10,000 is put in a savings account paying interest of 4% compounded annually, what
amount will be in the account at the end of 5 years?
a. $8,220
b. $12,000
c. $12,155
d. $12,167
33. Common Ground Corporation issued $8,000,000, 10-year bonds and agreed to make
annual sinking fund deposits of $620,000. The deposits are made at the end of each year
into an account paying 6% annual interest. Common Ground has the following values
related to the time value of money and compounded interest decisions.
Present value of 1 for 10 periods at 6% 0.55839
Future value of 1 for 10 periods at 6% 1.79085
Present value of an annuity of 1 for 10 periods at 6% 7.36009
Future value of an annuity of 1 for 10 periods at 6% 13.18079
To the closest dollar, what amount will be in the sinking fund at the end of 10 years?
a. $4,467,120
b. $4,563,256
c. $8,172,090
d. $12,800,000
34. If $13,000 is deposited in a savings account at the end of each year and the account pays
interest of 5% compound annually, what will be the balance of the account at the end of
10 years?
a. $13,650
b. $211,757
c. $163,512
d. $136,500
35. Which table has a factor of 1.00000 for 1 period at every interest rate?
a. Future value of 1
b. Future value of an annuity of 1
c. Present value of 1
d. Present value of an annuity of 1
Time Value of Money
D – 9
36. SCI Company deposits $15,000 in a fund at the end of each year for 7 years. The fund
pays interest of 3% compounded annually. The balance in the fund at the end of 7 years
is computed by multiplying
a. $15,000 by the future value of 1 factor.
b. $75,000 by 1.07.
c. $75,000 by 1.70.
d. $15,000 by the future value of an annuity factor.
37. The future value of an annuity factor for 2 periods is equal to
a. 1 plus the interest rate.
b. 2 plus the interest rate.
c. 2 minus the interest rate.
d. 2.
38. If $22,000 is deposited in a savings account at the end of each year and the account pays
interest of 5% compounded annually, what will be the balance of the account at the end of
10 years?
a. $23,100
b. $231,000
c. $276,714
d. $303,600
39. Which of the following is not necessary to know in computing the future value of an
annuity?
a. Amount of the periodic payments
b. Interest rate
c. Number of compounding periods
d. Year the payments begin
40. In present value calculations, the process of determining the present value is called
a. allocating.
b. pricing.
c. negotiating.
d. discounting.
41. Present value is based on
a. the dollar amount to be received.
b. the length of time until the amount is received.
c. the interest rate.
d. all of these answer choices are correct.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D – 10
42. Which of the following accounting problems does not involve a present value calculation?
a. The determination of the market price of a bond
b. The determination of the declining-balance depreciation expense
c. The determination of the amount to report for long-term notes payable
d. The determination of the amount to report for lease liability
43. If you are able to earn a 6% rate of return, what amount would you need to invest to have
$6,500 one year from now?
a. $6,011.79
b. $6,132.10
c. $5,817.50
d. $6,190.47
44. If you are able to earn a 15% rate of return, what amount would you need to invest to
have $6,500 one year from now?
a. $6,435.65
b. $5,687.50
c. $5,525.00
d. $5,652.20
45. If the single amount of $12,500 is to be received in 2 years and discounted at 11%, its
present value is
a. $11,363.75.
b. $10,145.25.
c. $11,261.25.
d. $10,330.63.
46. If the single amount of $5,000 is to be received in 3 years and discounted at 6%, its
present value is
a. $4,198.10.
b. $4,717.30.
c. $4,450.00.
d. $4,395.45.
Time Value of Money
D – 11
47. Which of the following discount rates will produce the smallest present value?
a. 6%
b. 7%
c. 8%
d. 3%
48. Suppose you have a winning lottery ticket and you are given the option of accepting
$3,000,000 three years from now or taking the present value of the $3,000,000 now. The
sponsor of the prize uses a 5% discount rate. If you elect to receive the present value of
the prize now, the amount you will receive is
a. $2,591,520.
b. $2,518,860.
c. $2,670,000.
d. $3,000,000.
49. The amount you must deposit now in your savings account paying 6% interest, in order to
accumulate $2,000 for a down payment 5 years from now on a new Vintage Convertible
Mustang is
a. $400.
b. $1,494.52.
c. $1,492.44.
d. $1,400.00.
50. The amount you must deposit now in your savings account paying 5% interest, in order to
accumulate $15,000 for your first tuition payment when you start college in 3 years is
a. $13,350.
b. $12,957.60.
c. $12,594.30.
d. $13,289.40.
51. The present value of $10,000 to be received in 5 years will be smaller if the discount rate
is
a. increased.
b. decreased.
c. not changed.
d. equal to the stated rate of interest.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
D – 12
52. Mango Madness Company is considering purchasing equipment. The equipment will
produce the following cash flows:
Year 1 $40,000
Year 2 $30,000
Mango Madness requires a minimum rate of return of 10%. What is the maximum price
Mango Madness should pay for this equipment?
a. $61,157.10
b. $36,363.60
c. $70,000
d. $35,000
53. If Jane Key invests $15,501.28 now and she will receive $40,000 at the end of 11 years,
what annual rate of interest will she be earning on her investment?
a. 8%
b. 8.5%
c. 9%
d. 10%
54. Patrick Mazzeo has been offered the opportunity of investing $89,278.45 now. The
investment will earn 8% per year and at the end of its life will return $250,000 to Patrick.
How many years must Patrick wait to receive the $250,000?
a. 1011
b. 1112
c. 1213
d. 1314
55. Suppose you have a winning lottery ticket and you are given the option of accepting
$7,000,000 three years from now or taking the present value of the $7,000,000 now. The
sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of
the prize now, the amount you will receive is
a. $5,877,340.
b. $6,046,880.
c. $6,230,000.
d. $7,000,000.
Time Value of Money
D – 13
56. The amount you must deposit now in your savings account paying 6% interest, in order to
accumulate $20,000 for a down payment 5 years from now on a new Ferrari 458 is
a. $4,000.00.
b. $14,945.20.
c. $14,924.40.
d. $14,000.00.
57. The amount you must deposit now in your savings account paying 5% interest, in order to
accumulate $18,000 for your first tuition payment when you start law school in 3 years is
a. $15,300.00.
b. $14,094.00.
c. $15,549.12.
d. $15,947.28.
58. Akers Company is considering purchasing a machine. The machine will produce the
following cash flows:
Year 1 $30,000
Year 2 $45,000
Akers requires a minimum rate of return of 10%. What is the maximum price Akers should
pay for this machine?
a. $64,462.95
b. $27,272.70
c. $75,000.00
d. $37,500.00
59. Koppernaes Corporation earns 12% on an investment that will return $1,350,000, 7 years
from now. Below is some of the time value of money information that Koppernaes has
compiled that might help in planning compounded interest decisions.
Present value of 1 for 7 periods at 12% 0.45235
Future value of 1 for 7 periods at 12% 2.21068
Present value of an annuity of 1 for 7 periods at 12% 4.56376
Future value of an annuity of 1 for 7 periods at 12% 10.08901
To the closest dollar, what is the amount Koppernaes should invest now to earn this rate
of return?
a. $298,442
b. $610,673
c. $1,134,,000
d. $616,107