Enter the letter corresponding to the response that best completes each of the following statements or questions.
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| 1 | |
The Sanchez Company purchased a delivery truck on February 1, 2006. The purchase agreement required Sanchez to pay the total amount due of $15,000 on February 1, 2007. Assuming an 8% rate of interest, the calculation of the price of the truck would involve multiplying $15,000 by the: |
| | A) | Future amount of an ordinary annuity of $1. |
| | B) | Present value of $1. |
| | C) | Present value of an ordinary annuity. |
| | D) | Future value of $1. |
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| 2 | |
Sandra wants to calculate how much money she needs to deposit today into a savings account which earns 5% in order to be able to withdraw $3,000 at the end of each of the next 6 years. She should use which present value concept? |
| | A) | Present value of $1 for 6 periods. |
| | B) | Present value of an annuity due of $1 for 6 periods. |
| | C) | Present value of an ordinary annuity of $1 for 6 periods. |
| | D) | Future value of $1 for 6 periods. |
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| 3 | |
The Richards Company purchased a machine for $5,000 down and $300 a month payable at the end of each of the next 36 months. How would the cash price of the machine be calculated, assuming the annual interest rate is given? |
| | A) | $5,000 plus the present value of $10,800 ($300 x 36). |
| | B) | $5,000 plus the present value of an annuity due of $300 for 36 periods. |
| | C) | $15,800. |
| | D) | $5,000 plus the present value of an ordinary annuity of $300 for 36 periods. |
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| 4 | |
Given a set of present value tables, an annual interest rate, the dollar amount of equal payments made, and the number of semiannual payments, what other information is necessary to calculate the present value of the series of payments? |
| | A) | The future value of the annuity. |
| | B) | The timing of the payments (whether they are at the beginning or end of the period). |
| | C) | The rate of inflation. |
| | D) | No other information is required. |
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| 5 | |
Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is .909 and for two periods at 10% is .826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to: |
| | A) | $180,000 |
| | B) | $163,620. |
| | C) | $155,320. |
| | D) | $148,680. |
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| 6 | |
The Bello Corporation wishes to accumulate $2,000,000 for plant expansion. The funds are required on January 1, 2011. Bello intends to make five equal annual deposits in a fund that will earn interest at 7% compounded annually. The first deposit is made on January 1, 2006. Present value and future value facts are as follows:
| Present value of $1 at 7% for 5 periods | .713 | | Present value of an ordinary annuity of $1 at 7% for 5 periods | 4.10 | | Future value of an ordinary annuity of $1 at 7% for 5 periods | 5.75 | | Future value of an annuity due of $1 at 7% for 5 periods | 6.15 |
What is the amount of the required annual deposit? |
| | A) | $325,203. |
| | B) | $347,826 |
| | C) | $487,805 |
| | D) | $426,000 |
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| 7 | |
The Jamison Corporation agrees to pay an employee $10,000 a year for five years beginning three years from today and decides to fund the payments by depositing one lump sum in a savings account today. The company should use which present value concept to determine the required deposit? |
| | A) | Future value of $1. |
| | B) | Present value of a deferred annuity. |
| | C) | Future value of a deferred annuity. |
| | D) | None of the above. |
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| 8 | |
Harry Morgan plans to make 30 quarterly deposits of $200 into a savings account. The first deposit will be made immediately. The savings account pays interest at an annual rate of 8%, compounded quarterly. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period? (Use the appropriate table in the text.) |
| | A) | $8,114 |
| | B) | $24,469 |
| | C) | $6,000 |
| | D) | $8,276 |
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| 9 | |
Assume the same data as in question 8, except that Harry will make the quarterly deposits at the end of the quarter. How much will Harry have accumulated in the savings account at the end of the seven and a half-year period? (Use the appropriate table in the text.) |
| | A) | $8,114 |
| | B) | $24,469 |
| | C) | $6,000 |
| | D) | $8,276 |
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| 10 | |
The Strug Company purchased office furniture and equipment for $8,600 and agreed to pay for the purchase by making five annual installment payments beginning one year from today. The installment payments include interest at 8%. What is the required annual installment payment? (Use the appropriate table in the text.) |
| | A) | $1,720 |
| | B) | $2,154 |
| | C) | $1,994 |
| | D) | $1,466 |
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| 11 | |
Assume the same data as in question 10, except that the installment payments begin immediately. What is the required annual installment payment? (Use the appropriate table in the text.) |
| | A) | $1,720 |
| | B) | $2,154 |
| | C) | $1,994 |
| | D) | $1,466 |
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| 12 | |
On March 31, 2006, the Freeman Company leased a machine. The lease agreement requires Freeman to pay 10 annual payments of $6,000 on each March 31, with the first payment due on March 31, 2006. Assuming an interest rate of 10% and that this lease is treated as an installment sale, Freeman will initially value the machine by multiplying $6,000 by which of the following factors? |
| | A) | Present value of $1 at 10% for 10 periods. |
| | B) | Present value of an ordinary annuity of $1 at 10% for 10 periods. |
| | C) | Present value of an annuity due of $1 at 10% for 10 periods. |
| | D) | Future value of an annuity due of $1 at 10% for 10 periods. |
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| 13 | |
The Stacey Mack Corporation used the expected cash flow approach to determine the present value of a future obligation to be paid in four years. Estimated future payment possibilities were as follows:
| Possible payment | Probability | | $50 million | 20% | | 70 million | 40% | | 90 million | 40% |
The risk-free interest rate is 5%. What is the estimated present value of the future obligation? |
| | A) | $57.589 million. |
| | B) | $60.880 million. |
| | C) | $74.043 million. |
| | D) | $70 million. |
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