36) Juan has just received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. In order to calculate the overall value of the prize today, which of the following tables would be the best for him to use?
A) Present Value of $1
B) Present Value of an Annuity of $1
C) Future Value of $1
D) Future Value of an Annuity of $1
Answer: B
Diff: 1
LO: 21-3
EOC Ref: S21-7
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
37) Julio has just received a legal judgment in a civil court case which awards him a settlement of $24,000 to be received two years from now. In order to calculate the overall value of the award today, which of the following tables would be the best for him to use?
A) Present Value of $1
B) Present Value of an Annuity of $1
C) Future Value of $1
D) Future Value of an Annuity of $1
Answer: A
Diff: 1
LO: 21-3
EOC Ref: S21-7
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
38) Jim wants to invest $5,000 at the end of each year for the next 10 years to prepare for his retirement. He believes he can earn 7% on his investments. What will the value of his investment be at the end of 10 years?
Future Value of an Annuity of $1
|
|
|
|
|
|
|
|
4%
|
5%
|
6%
|
7%
|
8%
|
9%
|
1
|
1.000
|
1.000
|
1.000
|
1.000
|
1.000
|
1.000
|
2
|
2.040
|
2.050
|
2.060
|
2.070
|
2.080
|
2.090
|
3
|
3.122
|
3.153
|
3.184
|
3.215
|
3.246
|
3.278
|
4
|
4.246
|
4.310
|
4.375
|
4.440
|
4.506
|
4.573
|
5
|
5.416
|
5.526
|
5.637
|
5.751
|
5.867
|
5.985
|
6
|
6.633
|
6.802
|
6.975
|
7.153
|
7.336
|
7.523
|
7
|
7.898
|
8.142
|
8.394
|
8.654
|
8.923
|
9.200
|
8
|
9.214
|
9.549
|
9.897
|
10.26
|
10.64
|
11.03
|
9
|
10.58
|
11.03
|
11.49
|
11.98
|
12.49
|
13.02
|
10
|
12.01
|
12.58
|
13.18
|
13.82
|
14.49
|
15.19
|
A) $61,060
B) $69,900
C) $62,650
D) $69,100
Answer: D
Explanation: D) Calculations: 13.82 × $5,000 = $69,100
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
39) Wilhelmina has just received an inheritance of $50,000, and she would like to put it into an investment portfolio for 8 years. She believes she can earn 4% on the investment. What will the value of the investment be at the end of 8 years?
Future Value of $1
|
|
|
|
|
|
|
|
4%
|
5%
|
6%
|
7%
|
8%
|
9%
|
1
|
1.040
|
1.050
|
1.060
|
1.070
|
1.080
|
1.090
|
2
|
1.082
|
1.103
|
1.124
|
1.145
|
1.166
|
1.188
|
3
|
1.125
|
1.158
|
1.191
|
1.225
|
1.260
|
1.295
|
4
|
1.170
|
1.216
|
1.262
|
1.311
|
1.360
|
1.412
|
5
|
1.217
|
1.276
|
1.338
|
1.403
|
1.469
|
1.539
|
6
|
1.265
|
1.340
|
1.419
|
1.501
|
1.587
|
1.677
|
7
|
1.316
|
1.407
|
1.504
|
1.606
|
1.714
|
1.828
|
8
|
1.369
|
1.477
|
1.594
|
1.718
|
1.851
|
1.993
|
9
|
1.423
|
1.551
|
1.689
|
1.838
|
1.999
|
2.172
|
10
|
1.480
|
1.629
|
1.791
|
1.967
|
2.159
|
2.367
|
A) $62,400
B) $59,670
C) $68,450
D) $69,220
Answer: C
Explanation: C) Calculations: 1.369 × $50,000 = $68,450
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
40) Juan has just received a prize which entitles him to receive annual payments of $10,000 at the end of each year for the next 10 years. He would like to sell the rights to the prize money to a financial institution, so that he can have the cash now. In order to estimate the present value of the prize, he will use a discount rate of 5%. What is the present value of the prize?
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
6
|
5.076
|
4.917
|
4.767
|
4.623
|
4.486
|
4.355
|
7
|
5.786
|
5.582
|
5.389
|
5.206
|
5.033
|
4.868
|
8
|
6.463
|
6.210
|
5.971
|
5.747
|
5.535
|
5.335
|
9
|
7.108
|
6.802
|
6.515
|
6.247
|
5.995
|
5.759
|
10
|
7.722
|
7.360
|
7.024
|
6.710
|
6.418
|
6.145
|
A) $61,450
B) $71,080
C) $77,220
D) $71,080
Answer: C
Explanation: C) Calculations: 7.722 × $10,000 = $77,220
Diff: 2
LO: 21-3
EOC Ref: S21-7
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
41) Julio has just received a legal judgment in a civil court case which awards him a settlement of $24,000 to be received two years from now. He would like to sell the rights to the settlement money to a financial institution, so that he can have the cash now. In order to estimate the present value of the settlement, he will use a discount rate of 6%. What is the present value of the settlement?
Present Value of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
0.907
|
0.890
|
0.873
|
0.857
|
0.842
|
0.826
|
3
|
0.864
|
0.840
|
0.816
|
0.794
|
0.772
|
0.751
|
4
|
0.823
|
0.792
|
0.763
|
0.735
|
0.708
|
0.683
|
5
|
0.784
|
0.747
|
0.713
|
0.681
|
0.650
|
0.621
|
6
|
0.746
|
0.705
|
0.666
|
0.630
|
0.596
|
0.564
|
7
|
0.711
|
0.665
|
0.623
|
0.583
|
0.547
|
0.513
|
8
|
0.677
|
0.627
|
0.582
|
0.540
|
0.502
|
0.467
|
9
|
0.645
|
0.592
|
0.544
|
0.500
|
0.460
|
0.424
|
10
|
0.614
|
0.558
|
0.508
|
0.463
|
0.422
|
0.386
|
A) $20,160
B) $21,360
C) $22,360
D) $22,590
Answer: B
Explanation: B) Calculations: 0.890 × $24,000 = $21,360
Diff: 2
LO: 21-3
EOC Ref: S21-7
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
Learning Objective 21-4
1) Net present value is defined as the difference between the present value of the project's cash inflows and the investment's cost.
Answer: TRUE
Diff: 1
LO: 21-4
EOC Ref: Accounting Vocabulary
AACSB: Content/Knowledge
AICPA Business: Critical Thinking
AICPA Functional: Measurement
2) If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived risk for the investment.
Answer: FALSE
Diff: 1
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
3) Dakka Company is considering an investment of $500,000 in a financial instrument that is expected to return cash flows of $80,000 a year for 10 years. The operations manager says that it is a "no-brainer" because the total cash flows are $800,000, and it has a payback of just over six years. The VP Finance expresses caution. He says that because Dakka uses a 10% hurdle rate, a more thorough analysis may show that the investment does not qualify under the company's investment criteria. Considering the information provided, the company should reject the investment.
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
6
|
5.076
|
4.917
|
4.767
|
4.623
|
4.486
|
4.355
|
7
|
5.786
|
5.582
|
5.389
|
5.206
|
5.033
|
4.868
|
8
|
6.463
|
6.210
|
5.971
|
5.747
|
5.535
|
5.335
|
9
|
7.108
|
6.802
|
6.515
|
6.247
|
5.995
|
5.759
|
10
|
7.722
|
7.360
|
7.024
|
6.710
|
6.418
|
6.145
|
Answer: TRUE
Explanation: Calculations: $500,000 - (6.145 × $80,000) = ($8,400)
Diff: 2
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
4) Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. If the company analyzes the project using NPV, this should be considered a good investment opportunity.
Present Value of an Annuity of $1
|
|
|
|
|
|
|
|
5%
|
6%
|
7%
|
8%
|
9%
|
10%
|
1
|
0.952
|
0.943
|
0.935
|
0.926
|
0.917
|
0.909
|
2
|
1.859
|
1.833
|
1.808
|
1.783
|
1.759
|
1.736
|
3
|
2.723
|
2.673
|
2.624
|
2.577
|
2.531
|
2.487
|
4
|
3.546
|
3.465
|
3.387
|
3.312
|
3.240
|
3.170
|
5
|
4.329
|
4.212
|
4.100
|
3.993
|
3.890
|
3.791
|
Answer: TRUE
Explanation: Calculations: $1,000,000 - (4.100 × $300,000) = $230,000
Diff: 2
LO: 21-4
EOC Ref: E21-22
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement