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Exam 26: Present and Future Values in Accounting

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Question 21

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Protocol Company has acquired equipment from a dealer that requires equal payments of $12,000 at the end of each of the next five years. This transaction includes interest at 9%, compounded annually. What is the value of the machine today?

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Question 22

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Sandra has a savings account that has accumulated to $50,000. She started with $28,225, and earned interest at 10% compounded annually. It took her five years to accumulate the $50,000. (^{PV of $1}, ^{FV of $1}, ^{PVA of $1}, and ^{FVA of $1}) (Use appropriate factor(s) from the tables provided.)

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B) False

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Question 23

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Explain the concept of the present value of an annuity.

From the perspective of an account holder, a savings account is a liability with interest.

A company has $50,000 today to invest in a fund that will earn 7%. How much will the fund contain at the end of 8 years?

In a present value or future value table, the length of one time period may be interpreted as one year, one month, or any other length of time.

A company has $46,000 today to invest in a fund that will earn 4% compounded annually. How much will the fund contain at the end of 6 years?

Chris wants to accumulate $100,000 in 5 years. He plans on making equal semiannual deposits into an investment account that earns 12% semiannually in order to reach his goal. How much must Chris invest every six months? (^{PV of $1}, ^{FV of $1}, ^{PVA of $1}, and ^{FVA of $1}) (Use appropriate factor(s) from the tables provided.)

A company needs to have $200,000 in 4 years, and will create a fund to insure that the $200,000 will be available. If it can earn a 7% return compounded annually, how much must the company invest in the fund today to equal the $200,000 at the end of 4 years?

The number of periods in a future value calculation may only be expressed in years.

Explain the concept of the future value of a single amount.

A company is beginning a savings plan to purchase a new building. It will be saving $43,000 per year for the next 10 years. How much will the company have accumulated after the tenth year-end deposit, assuming the fund earns 9% interest?

Present and future value computations enable companies to measure or estimate the interest component of holding assets or liabilities over time.

A company borrows money from the bank by promising to make 8 semiannual payments of $9,000 each. How much is the company able to borrow if the interest rate is 10% compounded semiannually?

A company borrows money from the bank by promising to make 6 annual year-end payments of $27,000 each. How much is the company able to borrow if the interest rate is 9%?

A company is considering an investment that will return $22,000 semiannually at the end of each semiannual period for 4 years. If the company requires an annual return of 10%, what is the maximum amount it is willing to pay for this investment? (^{PV of $1}, ^{FV of $1}, ^{PVA of $1}, and ^{FVA of $1}) (Use appropriate factor(s) from the tables provided.)

Jackson has a loan that requires a $17,000 lump sum payment at the end of four years. The interest rate on the loan is 5%, compounded annually. How much did Jackson borrow today? (^{PV of $1}, ^{FV of $1}, ^{PVA of $1}, and ^{FVA of $1}) (Use appropriate factor(s) from the tables provided.)

Russell Company has acquired a building with a loan that requires payments of $20,000 every six months for 5 years. The annual interest rate on the loan is 12%. What is the present value of the building? (^{PV of $1}, ^{FV of $1}, ^{PVA of $1}, and ^{FVA of $1}) (Use appropriate factor(s) from the tables provided.)

An interest rate is also called a discount rate.

The number of periods in a present value calculation may only be expressed in years.