Matching Questions
1.
For each of the following situations in A through D, indicate the abbreviation of the table that should be used to solve for the solution requested. Place the abbreviation of the respective table in the space provided. You may use each table more than once or not at all.
Tables
PVOA Present value of an ordinary annuity
PVAD Present value of an annuity due
PV Present value of a sum
FVOA Future value of an ordinary annuity
FVAD Future value of an annuity due
FV Future value of a sum
_______A.How much would an investor deposit today in order to withdraw $12,000 at the beginning of each of the next four years, assuming that the first payment is withdrawn one year from today?
_______B.If interest rates are compounded semi-annually, how much will a company accumulate in three years after making six equal semi-annual payments of $15,000 each? The first payment will be made today.
_______C.If interest rates are compounded monthly, how much can a company withdraw per month for 6 months beginning one month from now if $100,000 is deposited today?
_______D.You want to buy a house for $200,000 and finance it with interest compounded monthly. If it is financed over a 12‑year period, what will be the amount of each annual payment, the first of which will be due at the beginning of the first year?
Short Problems
1.How much must be invested now to receive $10,000 per year for ten years if the first $10,000 is received today and the rate is 10%?
2.Ocean Corporation purchased a machine with a cash price of $35,000. Payments will be made at the end of every quarter for 30 payments beginning at the end of each quarter. The machine was financed at 12%. How much is each payment?
3.You deposited $4,000 per year annually starting on January 1, 2008 in a bank account which earns 10%. How much will accumulate by December 31, 2011, the date of the final payment?
4.Middlesex Enterprises plans to issue $120,000 of 10-year, 6% bonds. The effective yield at the time of issuance is 8%.
A.How much will the bonds sell for in the market if interest is paid annually?
B.How much will the bonds sell for in the market if interest is paid semi-annually?
5.The phone rings. You answer, “Hello.” Is this Billy Bob?” “Yes, it is.” “This is Ed McMahon. Congratulations You have just won the Just Kidding Clearing House sweepstakes How would you like us to pay you?”
You ponder over the best choice of accepting your winnings:
1. Equal payments of $250,000 at the end of each year for twenty years
2. A lump-sum payment of $2,400,000 today
3. A lump-sum payment of $100,000 today and payments of $400,000 at the end of every year for 10 years
All earnings can be invested at 10 percent. Make a choice of one of the three options. Show calculations.
6.Calculate the contract price of equipment that requires 20 annual payments of $5,000 at the end of each year, beginning one year after the purchase contract is signed. The interest rate expressed in the loan is 7%.
Short Essay Questions
1.Explain the concept of the "time value of money."
2.How does inflation affect the value of money over time?
3.How does an annuity due differ from an ordinary annuity?
4.Why is present value not used more liberally on financial statements?