(Test Bank) Managerial Accounting Tools for Business Decision Making

Weygandt, 9

Business

Test Bank

9th Edition

• $15.00 $50.00

---

Description

Test Bank for Managerial Accounting Tools for Business Decision Making, The downloadable file consists of 1031 pages, and the total size of the file is 7.95 MB. Purchase now only for highly discounted price.

Author(s): Weygandt

---

---

Study Note Preview

APPENDIX A TIME VALUE OF MONEY CHAPTER LEARNING OBJECTIVES 1. Compute interest and future values. Simple interest is computed on the principal only, while compound interest is computed on the principal and any interest earned that has not been withdrawn. To solve for future value of a single amount, prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. To solve for future value of an annuity, prepare a time diagram of the problem. Identify the amount of the periodic payments (receipts), the number of payments (receipts), and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of periods and the interest rate. 2. Compute present values. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). To solve for present value of a single amount, prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. To solve for present value of an annuity, prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of payments (receipts), and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. To compute the present value of notes and bonds, determine the present value of the principal amount and the present value of the interest payments. Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. To determine the present value of the series of interest payments, multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond. 3. Compute the present value in capital budgeting situations. Compute the present values of all cash inflows and all cash outflows related to the capital budgeting proposal (an investment-type decision). If the net present value is positive, accept the proposal (make the investment). If the net present value is negative, reject the proposal (do not make the investment). Test Bank for Managerial Accounting, Ninth Edition A - 2 4. Use a financial calculator to solve time value of money problems. Financial calculators can be used to solve the same and additional problems as those solved with time value of money tables. Enter into the financial calculator the amounts for all of the known elements of a time value of money problem (periods, interest rate, payments, future or present value), and the calculator solves for the unknown element. Particularly useful situations involve interest rates and compounding periods not presented in the tables. Time Value of Money A - 3 TRUE-FALSE STATEMENTS 1. Interest is the difference between the amount borrowed and the principal. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 2. Compound interest is computed on the principal and any interest earned that has not been paid or received. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 3. The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 4. When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table. Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 5. The process of determining the present value is referred to as discounting the future amount. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 6. A higher discount rate produces a higher present value. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 7. In computing the present value of an annuity, it is not necessary to know the number of discount periods. Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 8. The present value of a long-term note or bond is a function of two variables. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 9. The present value of an annuity is the value now of a series of future receipts or payments, discounted assuming compound interest. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 10. The decision to make long-term capital investments is best evaluated without considering the time value of money. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 11. In a capital budgeting decision, a positive net present value means the decision to invest should be accepted. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions Test Bank for Managerial Accounting, Ninth Edition A - 4 12. With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions MULTIPLE CHOICE QUESTIONS Note: Students will need future value and present value tables for some questions. 13. Compound interest is the return on principal a. only. b. for one or more periods. c. plus interest for two or more periods. d. for one period. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 14. The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1 Ans: A, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 15. If $40,000 is deposited in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $32,878 b. $48,000 c. $48,620 d. $48,666 Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $40,000 x 1.21665 = $48,666 Present value x FVIF (n=5 periods, i= 4%) = Future value 16. The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 17. All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions Time Value of Money A - 5 18. Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1 Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 19. McGoff Company deposits $20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying a. $20,000 by the future value of 1 factor. b. $100,000 by 1.04. c. $100,000 by 1.20. d. $20,000 by the future value of an annuity factor. Ans: D, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 20. The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 21. If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $48,867 b. $315,000 c. $377,337 d. $450,000 Ans: C, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $30,000 x 12.57789 = $377,337 Annuity x FVIFA (n = 10, i = 5%) = Future value of an annuity 22. Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions Test Bank for Managerial Accounting, Ninth Edition A - 6 23. In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting. Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 24. The present value of an amount is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. All of these answers are correct. Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 25. Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond b. The determination of the declining-balance depreciation expense c. The determination of the amount to report for long-term notes payable d. The determination of the amount to report for lease liability Ans: B, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: Project Management, IMA: Investment Decisions 26. If an investor is able to earn an 8% rate of return compounded annually, what amount would need to be invested to have $30,000 one year from now? a. $27,747 b. $27,778 c. $27,273 d. $29,700 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $30,000/ (100% + 8%) Future value/ (1 + rate of return) = Present value Using tables: $30,000 x 0.92593 = $27,778; Future Value x PVIF n = 1, i = 8 = Present Value 27. If an investor is able to earn a 15% rate of return compounded annually, what amount would need to be invested to have $15,000 one year from now? a. $14,852 b. $13,125 c. $12,750 d. $13,043 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $15,000/ (100% + 15%) Future value/ (1 + rate of return) = Present value Using tables: $15,000 x 0.86957 = $13,043; Future Value x PVIF n = 1, i = 15 = Present Value Time Value of Money A - 7 28. If the single amount of $2,000 is to be received in 2 years and discounted at 11% annually, its present value is a. $1,818. b. $1,623. c. $1,802. d. $2,754. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $2,000 x .81162 = $1,623 (Future value x PVIF n=2, i = 11) 29. If the single amount of $3,000 is to be received in 3 years and discounted at 6% annually, its present value is a. $2,519. b. $2,830. c. $2,600. d. $2,820. Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $3,000 x .83962 = $2,519 (Future value x PVIF n=3, i = 6%) 30. Which of the following discount rates will produce the smallest present value? a. 8% b. 9% c. 10% d. 4% Ans: C, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 31. Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 6% discount rate and discounts annually. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,518,860. b. $2,591,520. c. $2,670,000. d. $3,000,000. Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $3,000,000 x .83962 = $2,518,860 Future value x PVIF n=3, i=6 = Present value 32. The amount you must deposit now in your savings account, paying 6% interest compounded annually, in order to accumulate $6,000 for a down payment 5 years from now on a new car is a. $1,200. b. $4,484. c. $4,477. d. $4,200. Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions $6,000 x .74726 = $4,484 Future value x PVIF n=5, i =6 = Present value Test Bank for Managerial Accounting, Ninth Edition A - 8 33. The amount you must deposit now in your savings account, paying 5% interest compounded annually, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is a. $8,500. b. $7,830. c. $8,638. d. $8,860. Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions $10,000 x .83684 = $8,638 Future value x PVIF n=3, I =5 = Present value 34. The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest. Ans: A, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 35. Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $120,000 Year 2 $200,000 Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment? a. $274,381 b. $165,290 c. $320,000 d. $160,000 Ans: A, LO: 3, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: ($120,000 x,90909) + ($200,000 x .82645) = $273,381 (Year 1 cash flow x PVIF n=1, i=10) + (Year 2 cash flow x PVIF n=2, i=10) = Present value 36. If Sloane Joyner invests $10,514.70 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10% Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution: $10,514.70/ $30,000 = .3505 PVIF which for n=11, I is closest to 10% Time Value of Money A - 9 37. Suzy Douglas has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000? a. 10 b. 11 c. 12 d. 13 Ans: D, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: No, IMA: Investment Decisions Solution: $73,450/ $200,000 = .3677 Present value/ Future value = PVIF n= 13, I = 8% 38. Peter Johnson invests $35,516.80 now for a series of $5,000 annual payments beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive? a. 10 b. 12 c. 13 d. 15 Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution:$35,516.8/ $5,000 = 7.10336 Present value/ Annuity = PVAIF n = 13, i=10% 39. In order to compute the present value of an annuity, it is necessary to know the 1. discount rate. 2. number of discount periods 3. the amount of the periodic payments or receipts. a. both 1 and 2 b. both 2 and 3 c. 1, 2 and 3 d. other information in addition to 1, 2 and 3 Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 40. A $10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations? a. 5 interest periods, 6% interest b. 20 interest periods, 6% interest c. 20 interest periods, 1.5% interest d. 5 interest periods, 1.5% interest Ans: C, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Test Bank for Managerial Accounting, Ninth Edition A - 10 41. Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $114,199 b. $160,000 c. $46,975 d. $150,135 Ans: A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution:$40,000 x .. 2.85498= $114,199 Annuity x PVAF n=4, i =15 42. Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment? a. $180,000 b. $123,342 c. $165,772 d. $115,650 Ans: B, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution:$30,000 x 4.11141 = $123,342 Annuity x PVAF n=6, i =12 43. Demulza Company is considering an investment in equipment. The present value of cash inflows includes a. the present value of annual net operating cash flows, and the present value of the salvage value. b. the present value of annual net operating cash flows, but not the present value of the salvage value. c. neither the present value of annual net operating cash flows, nor the present value of the salvage value. d. the present value of the salvage value, but not the present value of annual net operating cash flows. Ans: A, LO: 3, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions 44. Which can be computed using a financial calculator? a. the future value of a single sum, and the future value of an annuity. b. the future value of a single sum, but not the future value of an annuity. c. neither the future value of a single sum, nor the future value of an annuity. d. the future value of an annuity, but not the future value of a single sum. Ans: A, LO: 4, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: None, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions EXERCISES Ex. 45 Jose Reynolds deposited $10,000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decision Time Value of Money A - 11 Solution 45 (5 min.) Use Table 1 $10,000 × 1.16986 (4 periods and 4%) = $11,698.60 Ex. 46 Wingate Company borrowed $90,000 on January 2, 2022. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Wingate repay at the end of the third year? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 46 (5 min.) Use Table 1 $90,000 × 1.19102 (3 periods and 6%) = $107,191.80 Ex. 47 Pleasant Company has decided to begin accumulating a fund for plant expansion. The company deposited $80,000 in a fund on January 2, 2020. Pleasant will also deposit $40,000 annually at the end of each year, starting in 2020. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2024 (after the 2024 deposit)? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 47 (8 min.) Use Tables 1 and 2 $80,000 × 1.21665 (5 periods and 4%; Table 1) = $ 97,332.00 $40,000 × 5.41632 (5 periods and 4%; Table 2) = 216,652.80 Fund Balance at December 31, 2024 $313,984.80 Ex. 48 Mandy How plans to buy an automobile and can deposit $3,000 toward the purchase today. If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in 3 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 48 (3 min.) Use Table 1 (3 periods and 8%) $3,000 × 1.25971 = $3,779.13. Ex. 49 Rob Honda plans to buy a home and can deposit $15,000 for the purchase today. If the annual interest rate is 8%, how much can Rob expect to have for a down payment in 5 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Test Bank for Managerial Accounting, Ninth Edition A - 12 Solution 49 (5 min.) Use Table 1 (5 periods and 8%) $15,000 × 1.46933 = $22,039.95. Ex. 50 Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their granddaughter, Sloane Martin. They will make these deposits on January 2 of each year. Bill and Ellen feel they can safely earn 8%. How much will be in this account on December 31 of the year 18? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 50 (5 min.) Use Table 2 (18 periods and 8%) $2,500 × 37.45024 = $93,625.60. Ex. 51 Bill Cigarettes acquired a bad habit of smoking in high school. Bill spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues, but he is keenly aware of financial issues. Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 51 (5 min.) Use Table 2 (20 periods and 8%) $840 × 45.76196 = $38,440.05. Ex. 52 Robin Clark’s internet service provider has offered an upgrade at an additional cost of $10 a month ($120 a year). Robin thinks it would be “cool” to have this benefit and after all $10 a month is not so much. Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the upgrade. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 52 (5 min.) Use Table 2 (20 periods and 9%) $120 × 51.16012 = $6,139.21. Ex. 53 Lamb Company deposited $15,000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Time Value of Money A - 13 Solution 53 (5 min.) Use Table 2 $15,000 × 6.80191 (6 periods and 5%) = $102,028.65 Ex. 54 Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 54 (5 min.) Use Table 2 $72,000 × 12.57789 (10 periods and 5%) = $905,608.08 Ex. 55 What is future value of $6,000 invested at the end of every year for 20 years at an interest rate of 9%? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 55 (5 min.) Use Table 2 (20 periods and 9%) $6,000 × 51.16012 = $306,960.72. Ex. 56 Flower Company is considering an investment which will return a lump sum of $2,500,000 six years from now. What amount should Flower Company pay for this investment to earn an 11% return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 56 (5 min.) Use Table 3 $2,500,000 × .53464 (6 periods and 11%) = $1,336,600 Ex. 57 Chang Company earns 12% on an investment that will return $400,000 eleven years from now. What is the amount Chang Company should invest now to earn this rate of return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 57 (5 min.) Use Table 3 $400,000 × .28748 (11 periods and 12%) = $114,992 Test Bank for Managerial Accounting, Ninth Edition A - 14 Ex. 58 If Kelly Cranford invests $11,970 now, she will receive $40,000 at the end of 14 years. What annual rate of return will Kelly earn on her investment? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 58 (5 min.) Use Table 3 Answer: 9% $11,970 ÷ $40,000 = .29925 Read across the 14-period row in Table 3 to find .29925 in the 9% column. Ex. 59 Luis Rodriguez wants to buy a car in 3 years. He will need $3,000 for a down payment. The annual interest rate is 9%. How much money must Rodriguez invest today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 59 (5 min.) Use Table 3 (3 periods and 9%) $3,000 × .77218 = $2,316.54. Ex. 60 Amy Brown plans to buy a surround sound stereo system for $1,100 after 3 years. If the interest rate is 6%, how much money should Brown set aside today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 60 (5 min.) Use Table 3 (3 periods and 6%) $1,100 × .83962 = $923.58. Ex. 61 (a) What is the present value of $90,000 due 7 years from now discounted at 9%? (b) What is the present value of $150,000 due 5 years from now discounted at 12%? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 61 (8 min.) Use Table 3 (a) $90,000 × .54703 (7 periods and 9%) = $49,232.70 (b) $150,000 × .56743 (5 periods and 12%) = $85,114.50 Ex. 62 Kim Black plans to buy a truck for $24,000 after 3 years. If the interest rate is 6%, how much money should Black set aside today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Time Value of Money A - 15 Solution 62 (3 min.) Use Table 3 (3 periods and 6%) $24,000 × .83962 = $20,150.88 Ex. 63 The North Carolina DMV leases a building for 20 years. The lease requires 20 annual payments of $12,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 63 (3 min.) Use Table 4 (19 periods and 10%) $12,000 + ($12,000 ´ 8.36492) = $112,379.04 Ex. 64 Frye Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount will Frye Company pay for this investment if the company earns an 8% return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 64 (3 min.) Use Table 4. $50,000 ´ 9.81815 (20 periods and 8%) = $490,907.50 Ex. 65 Sarah Denny purchased an investment for $40,260.48. From this investment, she will receive $6,000 annually for the next 10 years starting one year from now. What rate of interest will Denny be earning on her investment? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions Solution 65 (4 min.) Use Table 4 Answer: 8% $40,260.48 ÷ $6,000 = 6.71008 (10 periods and 8%) = 6.71008 Ex. 66 On January 1, 2022, Neel Das purchases a car for $25,000 and makes a 10% down payment. He obtains financing at12% interest with semiannual payments over 5 years beginning July 1, 2022. Instructions Compute the payment Das will make at the end of every 6 months. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Investment Decisions