(Test Bank) Financial Accounting

Spiceland , Thomas , Herrmann, 6

Business

Test Bank

6th Edition

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Test Bank for Financial Accounting, The downloadable file consists of 1463 pages, and the total size of the file is 5.63 MB. Purchase now only for highly discounted price.

Author(s): Spiceland , Thomas , Herrmann

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Version 1 1 APPENDIX C: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single a mount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ A dollar now is worth more than a do llar later. _____ Cash payments of equal amounts over time periods of equal length. _____ Accumulation of a series of equal payments. _____ Interest earned on the initial investment and on previous interest. _____ Accumulation of an amount with interes t. Version 1 2 2) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Simple interest i. Present value of an annuity Phrases: _____ Amount today equiv alent to a specified future amount. _____ The rate at which future dollars are equal to current dollars. _____ Interest earned on the initial investment only. _____ The factor that causes money today to be worth more than the same amount in the future. _____ Current worth of a series of equal payments received in the future. 3) Compute the future value of the following invested amounts at the specified periods and interest rates: Item Invested Amount Interest Rate Number of Periods a. $27,000 9% 11 b. $37,000 6% 5 c. $17,000 11% 16 Version 1 3 4) Compute the future value of the following invested amounts at the specified periods and interest rates: Item Invested Amount Interest Rate Number of Periods a. $20,000 8% 10 b. $30,000 4% 8 c. $10,000 12% 15 5) Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years? 6) Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved $8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years?Version 1 4 7) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rates: Item Invested Amount Interest Rate Number of Periods a. $34,000 7% 17 b. $13,000 4% 25 c. $50,000 11% 11 8) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item Invested Amount Interest Rate Number of Periods a. $40,000 7% 20 b. $20,000 6% 25 c. $50,000 11% 10 9) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item Invested Interest Rate Number of Version 1 5 Amount Periods a. $1,900 8% 1 b. $1,900 8% 2 c. $1,900 8% 3 d. $1,900 8% 4 10) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item Invested Amount Interest Rate Number of Periods a. $1,500 10% 1 b. $1,500 10% 2 c. $1,500 10% 3 d. $1,500 10% 4 11) If you had an investment opportunity that promises to pay you $26,000 in six years and you could earn a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity? Version 1 6 12) If you had an investment opportunity that promises to pay you $20,000 in three years and you could ear n a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity? 13) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after -tax cash savings of $9,000 the first year, $18,000 for the next two years, and $20,000 for the next two years. Assuming a 11% discount rate, calculate the total present value of the cash flows. 14) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after -tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows. 15) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should resu lt in after -tax cash savings of $6,000 the first year, $21,000 for the next two years, and $24,000 for the next two years. Assuming a 10% discount rate, calculate the total present value of the cash flows. Version 1 7 16) Price Mart is conside ring outsourcing its billing operations. A consultant estimates that outsourcing should result in after -tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Assuming a 12% discount rate, calculate t he total present value of the cash flows. 17) Hillsdale is considering two options for comparable computer software. Option A will cost $35,000 plus annual license renewals of $1,200 for three years, which includes technical support . Option B will cost $19,000 with technical support being an add -on charge. The estimated cost of technical support is $4,300 the first year, $3,300 the second year, and $2,300 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 6%. Ignore income taxes. Determine which option should be chosen based on present value considerations. 18) Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add -on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 8%. Ignore income taxes. Determine which option should be chosen based on present value considerations.Version 1 8 19) DON Corporation is contemplating the purchase of a machine that will produce net after - tax cash savings of $29,000 per ye ar for 4 years. At the end of four years, the machine can be sold to realize after -tax cash flows of $5,300. Assuming a 10% discount rate, calculate the total present value of the annual cash savings and the salvage value of the machine. 20) DON Corporation is contemplating the purchase of a machine that will produce net after - tax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after -tax cash flows of $5,000. Assuming a 12% discount ra te, calculate the total present value of the annual cash savings and the salvage value of the machine. 21) Baird Bros. Construction is considering the purchase of a machine at a cost of $122,000. The machine is expected to generate cash flows of $20,000 per year for twelve years and can be sold at the end of twelve years for $10,500. The discount rate is 8%. As sume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine.Version 1 9 22) Baird Bros. Construct ion is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. The discount rate is 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine. 23) Dobson Contractors is considering buying equipm ent at a cost of $80,000. The equipment is expected to generate cash flows of $15,100 per year for eight years and can be sold at the end of eight years for $6,000. The discount rate is 10%. Assume the equipment would be paid for on the first day of year o ne, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine. 24) Dobson Contractors is considering buying equipment at a cost of $75,000. The equi pment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.Version 1 10 25) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $8 9,000 per year for 5 years. Assuming a 7% discount rate, calculate the present value of the cash savings. 26) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 p er year for 5 years. Assuming an 8% discount rate, calculate the present value of the cash savings. 27) Samson Incorporated is contemplating the purchase of a machine that will provide it with net after -tax cash savings of $130,000 per year for 7 years. Assuming a 7% discount rate, calculate the present value of the cash savings. Version 1 11 28) Samson Incorporated is contemplating the purchase of a machine that will provide it with net after -tax cash savings of $100,000 per year for 8 years. Assuming a 10% discount rate, calculate the present value of the cash savings. Version 1 12 Answer Key Test name: Appx C_6e_Problems_Spiceland 1) h; a; d; f; b 2) g; c; h; e; i 3)a. FV = $27,000 × 2.58043 (Table FV of $1; n = 11; i = 9%) = $69,672. b. FV = $37,000 × 1.33823 (Table FV of $1; n = 5; i = 6%) = $49,514. c. FV = $17,000 × 5.31089 (Table FV of $1; n = 16; i = 11%) = $90,285. 4)a. FV = $20,000 × 2.15892 (Table FV of $1; n = 10; i = 8%) = $43,178. b. FV = $30,000 × 1.36857 (Table FV of $1; n = 8; i = 4%) = $41,057. c. FV = $10,000 × 5.47357 (Table FV of $1; n = 15; i = 12%) = $54,736. 5)No. FV = $15,000 × 1.19102 (Table F V of $1; n = 3; i = 6%) = $17,865, which is less than the $18,000 desired amount. 6)Yes. FV = $8,000 × 1.26248 (Table FV of $1; n = 4; i = 6%) = $10,100, which is more than the $10,000 desired amount. 7)a. PV = $34,000 × 0.31657 (Table PV of $ 1; n = 17; i = 7%) = $10,764. b. PV = $13,000 × 0.37512 (Table PV of $1; n = 25; i = 4%) = $4,877. c. PV = $50,000 × 0.31728 (Table PV of $1; n = 11; i = 11%) = $15,864. Version 1 13 8)a. PV = $40,000 × 0.25842 (Table PV of $1; n = 20; i = 7%) = $10,337. b. PV = $20,000 × 0.23300 (Table PV of $1; n = 25; i = 6%) = $4,660. c. PV = $50,000 × 0.35218 (Table PV of $1; n = 10; i = 11%) = $17,609. 9)a. PV = $1,900 × 0.92593 (Table PV of $1; n = 1; i = 8%) = $1,759. b. PV = $1,900 × 0.85734 (Table PV of $1; n = 2; i = 8%) = $1,629. c. PV = $1,900 × 0.79383 (Table PV of $1; n = 3; i = 8%) = $1,508. d. PV = $1,900 × 0.73503 (Table PV of $1; n = 4; i = 8%) = $1,397. 10)a. PV = $1,500 × 0.90909 (Table PV of $1 ; n = 1; i = 10%) = $1,364. b. PV = $1,500 × 0.82645 (Table PV of $1; n = 2; i = 10%) = $1,240. c. PV = $1,500 × 0.75131 (Table PV of $1; n = 3; i = 10%) = $1,127. d. PV = $1,500 × 0.68301 (Table PV of $1; n = 4; i = 10%) = $1,025. 11) PV = $26,00 0 × 0.56447 (Table PV of $1; n = 6; i = 10%) = $14,676. 12) PV = $20,000 × 0.75131 (Table PV of $1; n = 3; i = 10%) = $15,026. 13) Year Cash Flow PV Factor Present Value 1 $9,000 0.90090 (Table PV of $1; n = 1; i = 11%) $8,108 2 18,000 0.81162 (Table PV of $1; n = 2; i = 11%) 14,609 3 18,000 0.73119 (Table PV of $1; n = 3; i = 11%) 13,161 4 20,000 0.65873 (Table PV of $1; n = 4; i = 11%) 13,175 5 20,000 0.59345 (Table PV of $1; n = 5; i = 11%) 11,869 Total PV of cash savings $60,922 14)Version 1 14 Year Cash Flow PV Factor Present Value 1 $ 6,000 0.89286 (Table PV of $1; n = 1; i = 12%) $ 5,357 2 10,000 0.79719 (Table PV of $1; n = 2; i = 12%) 7,972 3 10,000 0.71178 (Table PV of $1; n = 3; i = 12%) 7,118 4 12,000 0.63552 (Table PV of $1; n = 4; i = 12%) 7,626 5 12,000 0.56743 (Table PV of $1; n = 5; i = 12%) 6,809 Total PV of Cash Savings $34,882 15) Year Cash Flow PV Factor Present Value 1 $6,000 0.90909 (Table PV of $1; n = 1; i = 10%) $5,455 2 21,000 0.82645 (Table PV of $1; n = 2; i = 10%) 17,355 3 21,000 0.75131 (Table PV of $1; n = 3; i = 10%) 15,778 4 24,000 0.68301 (Table PV of $1; n = 4; i = 10%) 16,392 5 24,000 0.62092 (Table PV of $1; n = 5; i = 10%) 14,902 Total PV of Cash Savings 69,882 16) Year Cash Flow PV Factor Present Value 1 $9,000 0.89286 (Table PV of $1; n = 1; i = 12%) $8,036 2 15,000 0.79719 (Table PV of $1; n = 2; i = 12%) 11,958 3 15,000 0.71178 (Table PV of $1; n = 3; i = 12%) 10,677 4 18,000 0.63552 (Table PV of $1; n = 4; i = 12%) 11,439 5 18,000 0.56743 (Table PV of $1; n = 5; i = 12%) 10,214 Total PV of Cash Savings $ 52,324