6) Which of the following describes the term
time value of money?
A) Money can only be used at certain times and for certain purposes.
B) Money loses its purchasing power over time through inflation.
C) Wasted time can result in wasted money.
D) When money is invested over time, it earns income and grows.
Answer: D
Diff: 1
LO: 21-3
EOC Ref: Accounting Vocabulary
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
7) Which of the following MOST accurately describes the term
annuity?
A) An investment which grows in value over time
B) An installment loan with amortizing principal payments
C) A stream of equal installments of cash payments
D) A term life insurance policy
Answer: C
Diff: 1
LO: 21-3
EOC Ref: Accounting Vocabulary
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
8) If $1,000 is invested in an account with 4% interest compounding yearly, what will the balance of the account be after 4 years? (You may ignore small differences that result from rounding.)
A) $1,218
B) $1,170
C) $1,040
D) $1,240
9) If $1,000 is invested in an account with 4% interest compounding yearly, what will the balance of the account be after 4 years? Please refer to the following Future Value table:
Future Value of $1
|
|
|
|
|
|
4%
|
5%
|
6%
|
7%
|
1
|
1.040
|
1.050
|
1.060
|
1.070
|
2
|
1.082
|
1.103
|
1.124
|
1.145
|
3
|
1.125
|
1.158
|
1.191
|
1.225
|
4
|
1.170
|
1.216
|
1.262
|
1.311
|
5
|
1.217
|
1.276
|
1.338
|
1.403
|
6
|
1.265
|
1.340
|
1.419
|
1.501
|
A) $1,218
B) $1,170
C) $1,040
D) $1,240
10) If $2,000 is invested in an account with 5% interest compounding yearly, what will the balance of the account be after 6 years? Please refer to the following Future Value table:
Future Value of $1
|
|
|
|
|
|
4%
|
5%
|
6%
|
7%
|
1
|
1.040
|
1.050
|
1.060
|
1.070
|
2
|
1.082
|
1.103
|
1.124
|
1.145
|
3
|
1.125
|
1.158
|
1.191
|
1.225
|
4
|
1.170
|
1.216
|
1.262
|
1.311
|
5
|
1.217
|
1.276
|
1.338
|
1.403
|
6
|
1.265
|
1.340
|
1.419
|
1.501
|
A) $1,340
B) $2,680
C) $2,676
D) $2,432
11) If $5,000 is invested in an account with 7% interest compounding yearly, what will the balance of the account be after 3 years? Please refer to the following Future Value table:
Future Value of $1
|
|
|
|
|
|
4%
|
5%
|
6%
|
7%
|
1
|
1.040
|
1.050
|
1.060
|
1.070
|
2
|
1.082
|
1.103
|
1.124
|
1.145
|
3
|
1.125
|
1.158
|
1.191
|
1.225
|
4
|
1.170
|
1.216
|
1.262
|
1.311
|
5
|
1.217
|
1.276
|
1.338
|
1.403
|
6
|
1.265
|
1.340
|
1.419
|
1.50
|
A) $6,180
B) $6,211
C) $5,867
D) $6,125
Answer: D
Explanation: D) Calculations: 1.225 × $5,000 = $6,125
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
12) If $1,000 is invested in an account with 9% interest compounding yearly, approximately how many years will it take for the amount to double? Please refer to the following Future Value table:
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) Slightly more than 8 years
B) Exactly 9 years
C) 5 years
D) Slightly less than 7 years
Answer: A
Explanation: A) Calculations: 1.993 only
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
13) John Doe wins the lottery and may pick from the following three choices:
Take $750,000 now.
Take $1,000,000 ten years from now.
Take $90,000 at the end of this year, and at the end of each following year for ten installments in
total.
Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the first option, how much is the present value of that alternative?
A) $750,000
B) $1,000,000
C) $450,000
D) $798,000
Answer: A
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
14) John Doe wins the lottery and may pick from the following three choices:
Take $750,000 now.
Take $1,000,000 ten years from now.
Take $90,000 at the end of this year, and at the end of each following year for ten installments in total.
Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the second option, how much is the present value of that alternative?
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) $614,000
B) $1,000,000
C) $750,000
D) $798,000
Answer: A
Explanation: A) Calculations: 0.614 × $1,000,000 = $614,000
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement
15) John Doe wins the lottery and may pick from the following three choices:
Take $750,000 now.
Take $1,000,000 ten years from now.
Take $90,000 at the end of this year, and at the end of each following year for ten installments in
total.
Assume that John Doe uses a discount rate of 5% to evaluate his choices. If he selects the third option, how much is the present value of that alternative?
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) $814,000
B) $900,000
C) $694,980
D) $798,000
Answer: C
Explanation: C) Calculations: 7.722 × $90,000 = $694,980
Diff: 2
LO: 21-3
EOC Ref: S21-8
AACSB: Analytic Skills
AICPA Business: Critical Thinking
AICPA Functional: Measurement