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Appendix B
Time Value of Money
QUICK STUDIES
Quick Study B-1 (10 minutes)
1. 2%
Quick Study B-2 (10 minutes)
Quick Study B-3 (10 minutes)
Quick Study B-4 (10 minutes)
Quick Study B-5 (10 minutes)
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix B 241
Quick Study B-6 (10 minutes)
Quick Study B-7 (10 minutes)
EXERCISES
Exercise B-1 (10 minutes)
Exercise B-2 (10 minutes)
Exercise B-3 (10 minutes)
Exercise B-4 (10 minutes)
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition
242
Exercise B-5 (10 minutes)
Exercise B-6 (10 minutes)
Exercise B-7 (10 minutes)
Interest rate per period = 12% annual / 12 months per year = 1% per month
Using Table B.3, where n = 40 and i = 1%, the p = 32.8347. This means:
Exercise B-8 (15 minutes)
Semiannual interest payment = $500,000 x 10% x 1/2 = $25,000
0.3083 x $500,000 = $154,150 present value of maturity amount
Exercise B-9 (15 minutes)
Exercise B-10 (15 minutes)
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix B 243
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition
244
Exercise B-11 (15 minutes)
Amount borrowed = present value of $20,000 at 10% for 3 years
Exercise B-12 (10 minutes)
a. p = present value of $60,000 at 9% for 4 years
b. p = present value of $15,000 at 8% for 2 years
c. There are at least two ways to solve this problem. (1) We can take the
$463 today, compute its future value, and then compare it to the future
value amount of $1,000. (2) We can discount the $1,000 back to the
present and compare it to the $463 today.
The same answer results: choose $463 today
f = future value of $463 at 9% for 10 years
p = present value of $1,000 at 9% for 10 years
d. f = future value of $90 at 5% for 8 years
e. f = future value of $158,500 at 10% for 8 years
Part 2: p = present value of $400 annuity at 6% for 10 years
The answer is the sum of the present values from parts 1 and 2:
g. p = present value of $500,000 at 6% for 20 years
Instructor note: It can be useful to extend this problem and assume a 30% tax rate. In this
case the annuity after-tax declines to $350,000. Accordingly, the present value of the
after-tax amount is $4,014,465. Again, nothing near the $10 million winnings advertised.
Exercise B-13 (25 minutes)
1.
First Annuity
Future
Payment
Number of
Periods
Interest
Rate
Table B.1
Value
Amount
Borrowed
First payment........ $5,000 1 6% 0.9434 $ 4,717
Second payment... 5,000 2 6 0.8900 4,450
Second Annuity
Future
Payment
Number of
Periods
Interest
Rate
Table B.1
Value
Amount
Borrowed
First payment........ $7,500 1 6% 0.9434 $ 7,076
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition
246
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix B 247
Exercise B-13 (Continued)
2.
First Annuity
Payment size...................................... $ 5,000
(difference from part (1) due to rounding)
Second Annuity
Payment size...................................... $ 7,500
(difference from part (1) due to rounding)
Exercise B-14 (30 minutes)
1. Present value of the annuity
Payment size...................................... $13,000
2. Present value of the annuity
Payment size...................................... $13,000
3. Present value of the annuity
Payment size...................................... $13,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition
248
Exercise B-15 (15 minutes)
10 years x 4 quarters = 40 interest periods
Exercise B-16 (15 minutes)
Exercise B-17 (15 minutes)
10 years x 4 quarters per year = 40 total quarters
Exercise B-18 (15 minutes)
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Appendix B 249
Exercise B-19 (20 minutes)
a. (1) Present Value of a single amount.
OR
(1) Future Value of a single amount.
b. (1) Future Value of an Annuity.
OR
(1) Present Value of an Annuity.
c. (1) Future Value of an Annuity.
d. (1) Present Value of an Annuity.
[Note: Students must recognize the present value of $225,000
received today is $225,000.]
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamental Accounting Principles, 21st Edition
250
