App C

APPENDIX C
TIME VALUE OF MONEY
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 K 3. 1 K 5. 2 K 7. 4 K 9. 5 K
2. 1 K 4. 2 K 6. 3 K 8. 4 K 10. 5 K
Multiple Choice Questions
11. 1 AP 21. 3 AP 31. 3 AP 41. 4 AP 51. 5 C
12. 1 C 22. 3 AP 32. 3 AP 42. 4 AP 52. 5 AP
13. 2 K 23. 3 AP 33. 3 AP 43. 4 C 53. 5 AP
14. 2 C 24. 3 C 34. 3 AP 44. 4 C 54. 5 AP
15. 2 C 25. 3 AP 35. 3 AP 45. 4 AP 55. 5 AP
16. 2 AP 26. 3 AP 36. 3 AP 46. 4 AP 56. 3 AP
17. 2 AP 27. 3 AP 37. 4 AP 47. 4 AP 57. 4 AP
18. 3 AP 28. 3 C 38. 4 AP 48. 5 C
19. 3 AP 29. 3 AP 39. 4 AP 49. 5 C
20. 3 C 30. 3 AP 40. 4 AP 50. 5 C
Exercises
58. 3 AP 62. 3 AP 66. 4 AP 70. 4 AP 74. 5 AP
59. 3 AP 63. 3 AP 67. 4 AP 71. 4 AP 75. 5 AP
60. 3 AP 64. 4 AP 68. 4 AP 72. 5 AP 76. 5 AP
61. 3 AP 65. 4 AP 69. 4 AP 73. 5 AP
Completion Statements
77. 1 K 78. 2 K 79. 4 K 80. 4 K 81. 5 K
Matching
82. 1 K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 2. TF 3. TF 11. MC 12. MC 77. C 82. MA
Study Objective 2
4. TF 13. MC 15. MC 17. MC
5. TF 14. TF 16. MC 78. C
Study Objective 3
6. TF 21. MC 25. MC 29. MC 33. MC 56. MC 61. Ex
18. MC 22. MC 26. MC 30. MC 34. MC 58. Ex 62. Ex
19. MC 23. MC 27. MC 31. MC 35. MC 59. Ex 63. Ex
20. MC 24. MC 28. MC 32. MC 36. MC 60. Ex
C-2 Test Bank for Accounting Principles, Ninth Edition
Study Objective 4
7. TF 39. MC 43. MC 47. MC 66. Ex 70. Ex
8. TF 40. MC 44. MC 57. MC 67. Ex 71. Ex
37. MC 41. MC 45. MC 64. Ex 68. Ex 79. C
38. MC 42. MC 46. MC 65. Ex 69. Ex 80. C
Study Objective 5
9. TF 49. MC 52. MC 55. MC 74. Ex 81. C
10. TF 50. MC 53. MC 72. Ex 75. Ex
48. MC 51. MC 54. MC 73. Ex 76. Ex
Note: TF = True-False C = Completion MA = Matching

MC = Multiple Choice Ex = Exercise
CHAPTER STUDY OBJECTIVES

1. Distinguish between simple and compound interest. 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that has not been withdrawn.
2. Identify the variables fundamental to solving present value problems. 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).
3. 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 1 table, multiply the future amount by the present value factor
specified at the intersection of the number of periods and the discount rate.
4. Solve for present value of an annuity. Prepare a time diagram of the problem. Identify the
future amounts (annuities), the number of discounting periods, 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.
5. Compute the present value of notes and bonds. To determine the present value of the
principal amount: 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.
Time Value of Money C-3
TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.
Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Investment Decisions
2. Compound interest is computed on the principal and any interest earned that has not
been paid or received.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
3. Simple interest is generally applicable only to short-term situations of one year or less.
4. The present value is the value now of a given amount to be paid or received in the future,
assuming simple interest.
5. The process of determining the present value is referred to as discounting the future
amount.
6. A higher discount rate produces a higher present value.

7. In computing the present value of an annuity, it is not necessary to know the number of
discount periods.
8. Discounting may be done on an annual basis or over shorter periods of time such as
semiannually.
9. The present value of a bond is a function of two variables: (1) the payment amounts and
(2) the discount rate.
10. When the discount rate is equal to the contractual rate, the present value of the bonds will
equal the bonds' face value.
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 3. T 5. T 7. F 9. F
2. T 4. F 6. F 8. T 10. T
MULTIPLE CHOICE QUESTIONS

Note: Students will need present value tables for several of these questions.
11. Jeremy Snow invested $12,000 at 8% annual interest and left the money invested without
withdrawing any of the interest for 15 years. At the end of the 15 years, Jeremy withdrew
the accumulated amount of money. What amount did Jeremy withdraw, assuming the
investment earns simple interest?
a. $14,400
b. $26,400
c. $22,500
d. $13,200
Ans: B, SO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Investment Decisions
12. Jenny Carson invested $12,000 at 8% annual interest and left the money invested without
withdrawing any of the interest for 15 years. At the end of the 15 years, Jenny decided to
withdraw the accumulated amount of money. Jenny has found the following values in
various tables related to the time value of money.
Present Value of 1 for 15 periods at 8% 0.31524
Future Value of 1 for 15 periods at 8% 3.17217
Present Value of an Annuity of 1 for 15 periods at 8% 8.55948
Future Value of an Annuity of 1 for 15 periods at 8% 27.15211
Which factor would she use to compute the amount she would withdraw, assuming that
the investment earns interest compounded annually?
a. 0.31524
b. 3.17217
c. 8.55948
d. 27.15211
Ans: B, SO: 1, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
13. In present value calculations, the process of determining the present value is called
a. allocating.
b. pricing.
c. negotiating.
d. discounting.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
14. Present value 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.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
15. 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 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, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
16. If you are able to earn an 8% rate of return, what amount would you need to invest to
have $10,000 one year from now?
a. $9,248.90
b. $9,259.26
c. $9,090.90
d. $9,900.00
17. If you are able to earn a 15% rate of return, what amount would you need to invest to
have $5,000 one year from now?
a. $4,950.45
b. $4,375.00
c. $4,250.00
d. $4,347.83
Ans: D, SO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
18. If a single future amount of $1,500 is to be received in 2 years and discounted at 11%, its
present value is
a. $1,363.65.
b. $1,217.43.
c. $1,351.35.
d. $1,239.68.
19. If a single future amount of $2,000 is to be received in 3 years and discounted at 6%, its
present value is
a. $1,679.25.
b. $1,886.80.
c. $1,733.40.
d. $1,880.00.
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
20. Which of the following discount rates will produce the smallest present value?
a. 9%
b. 10%
c. 12%
d. 6%
Ans: C, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
21. Suppose you have a winning sweepstakes ticket and you are given the option of
accepting $1,000,000 three years from now or taking the present value of the $1,000,000
now. The sponsor of the prize uses a 7% discount rate. If you elect to receive the present
value of the prize now, the amount you will receive is
a. $816,298.
b. $873,440.
c. $934,580.
d. $1,000,000.
22. The amount you must deposit now in your savings account, paying 6% interest, in order to
accumulate $2,000 for a down payment 5 years from now on a new car is
a. $400.00.
b. $1,494.52.
c. $1,492.44.
d. $1,400.00.
accumulate $4,000 for your first tuition payment when you start college in 3 years is
a. $3,400.00.
b. $3,132.00.
c. $3,455.35.
d. $3,543.84.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
24. 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 interest rate.
Ans: A, SO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
25. If Jane Mott invests $88,785 now and she will receive $150,000 at the end of 9 years,
what annual rate of interest will she be earning on her investment?
a. 4%
b. 4.5%
c. 5%
d. 6%
26. Kelly Doughty has been offered the opportunity of investing $84,820 now. The investment
will earn 10% per year and at the end of its life will return $200,000 to Kelly. How many
years must Kelly wait to receive the $200,000?
a. 8
b. 9
c. 10
d. 11
Ans: B, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
27. Birk Company is considering purchasing equipment. The equipment will produce the
following cash flows:
Year 1 $90,000
Year 2 $150,000
Birk requires a minimum rate of return of 10%. What is the maximum price Birk should pay
for this equipment?
a. $205,785
b. $123,968
c. $240,000
d. $120,000
28. Which of the following discount rates will produce the largest present value?
a. 8%
b. 9%
c. 10%
d. 4%
Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
29. Suppose you have a winning lottery ticket and you are given the option of accepting
$500,000 three years from now or taking the present value of the $500,000 now. The
sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of
the prize now, the amount you will receive is
a. $500,000.
b. $445,000.
c. $431,920.
d. $419,810.
accumulate $3,000 for a down payment 5 years from now on a new Toyota Camry is
a. $600.00.
b. $2,100.00.
c. $2,238.66.
d. $2,241.78.
31. Giffin Company is considering purchasing machinery. The machinery will produce the
following cash flows:
Year 1 $40,000
Year 2 $60,000
Giffin requires a minimum rate of return of 10%. What is the maximum price Giffin should
pay for this machinery?
a. $85,950.60
b. $42,975.30
c. $100,000
d. $50,000
Ans: A, SO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
32. If Brenda Malone invests $7,009.87 now and she will receive $20,000 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%
33. Tina Iverson has been offered the opportunity of investing $36,770 now. The investment
will earn 8% per year and at the end of its life will return $100,000 to Tina. How many
years must Tina wait to receive the $100,000?
a. 10
b. 11
c. 12
d. 13
34. Steve Herbert invests $7,103.36 now for a series of $1,000 annual returns beginning one
year from now. Steve will earn 10% on the initial investment. How many annual payments
will Steve receive?
a. 10
b. 12
c. 13
d. 15
35. Danner Corporation earns 12% on an investment that will return $900,000, 7 years from
now. Below is some of the time value of money information that Danner has compiled that
might help in planning compound interest decisions.
To the closest dollar, what is the amount Danner should invest now to earn this rate of
return?
a. $198,961
b. $407,115
c. $756,000
d. $410,738
36. Donaldson Company is considering an investment, which will return a lump sum of
$450,000 four years from now. Below is some of the time value of money information that
Donaldson has compiled that might help in planning compound interest decisions.
To the closest dollar, what amount should Donaldson Company pay for this investment to
earn a 10% return?
a. $270,000
b. $180,000
c. $307,355
d. $356,609
37. Barnard Company is considering investing in an annuity contact that will return $40,000
annually at the end of each year for 12 years. Barnard has obtained the following values
related to the time value of money to help in its planning process and compound interest
decisions.
To the closest dollar, what amount should Ritz Company pay for this investment if it earns
a 9% return?
a. $497,066
b. $592,507
c. $805,629
d. $286,429
Ans: D, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
C - 10 Test Bank for Accounting Principles, Ninth Edition
38. Anderson Corporation issues an 8%, 9-year mortgage note on January 1, 2009, to obtain
financing for new equipment. Land is used as collateral for the note. The terms provide for
semiannual installment payments of $131,600. The following values related to the time
value of money were available to Anderson to help them with their planning process and
compound interest decisions.
To the closest dollar, what were the cash proceeds received from the issuance of the
note?
a. $822,091
b. $947,520
c. $1,665,964
d. $1,643,363
Ans: C, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
39. Gomez Company is considering purchasing equipment. The equipment will produce the
following cash flows: Year 1, $25,000; Year 2, $45,000; Year 3, $60,000. Below is some
of the time value of money information that Gomez has compiled that might help them in
their planning and compound interest decisions.
1 period, 11% 2 periods, 11% 3 periods, 11%
Present Value of 1 0.90090 0.81162 0.73119
Future Value of 1 1.11000 1.23210 1.36763
Present Value of an Annuity of 1 0.90090 1.71252 2.44371
Future Value of an Annuity of 1 1.00000 2.12000 3.37440
Gomez requires a minimum rate of return of 11%. To the closest dollar, what is the
maximum price Gomez should pay for the equipment?
a. $317,682
b. $102,917
c. $165,253
d. $246,209
Ans: B, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
Time Value of Money C - 11
40. Nathan Company earns 11% on an investment that pays back $220,000 at the end of
each of the next 5 years. Nathan's finance department has the following values related to
the time value of money to help in its planning process and compound interest decisions.
To the closest dollar, what is the amount Nathan invested to earn the 11% rate of return?
a. $370,713
b. $130,559
c. $59,525
d. $141,935
Ans: B, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
41. Pittman Company has just purchased equipment that requires annual payments of
$10,000 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. $28,549.80
b. $40,000.00
c. $11,743.64
d. $37,533.56
42. Mareska Company has purchased equipment that requires annual payments of $10,000
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. $60,000.00
b. $41,114.10
c. $55,257.36
d. $38,549.80
43. A $10,000, 8%, 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, 8% interest
b. 20 interest periods, 8% interest
c. 20 interest periods, 2.0% interest
d. 5 interest periods, 2.0% interest
Ans: C, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
44. In order to compute the present value of an annuity, it is necessary to know the
1. discount rate.
2. number of discount periods and the amount of the periodic payments or
receipts.
a. 1
b. 2
c. both 1 and 2
d. something in addition to 1 and 2
Ans: C, SO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
45. Howard Company has just signed a capital lease contract for equipment that requires
annual lease payments of $24,000 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 lease payments?
a. $68,519.49
b. $96,000.00
c. $28,184.73
d. $90,080.55
46. Faldo Company has signed a capital lease contract for equipment that requires annual
rental payments of $15,000 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 capitalize the leased
equipment?
a. $90,000.00
b. $61,671.10
c. $82,886.05
d. $57,824.70
47. Ann Rennert invests $149,738 now for a series of $20,000 annual returns beginning one
year from now. Ann will earn 9% on the initial investment. How many annual payments will
Ann receive?
a. 8
b. 10
c. 12
d. 13
Ans: D, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
48. If a bond has a stated interest rate of 5%, but the market interest rate is 6%, the bond
a. will sell at a discount.
b. will sell at a premium.
c. may sell at either a premium or a discount.
d. will sell at its par value.
Ans: A, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
49. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the interest payments is determined from the Table for the
1. present value of 1.
2. present value of an annuity of 1.
a. 1
b. 2
c. both 1 and 2
d. neither 1 nor 2
Ans: B, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
50. When determining the proceeds received when issuing a bond, the factor applied to the
amount of the bond principal is determined from the table for the
a. present value of 1.
b. present value of annuity of 1.
c. future value of 1.
d. none of these.
Ans: A, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
51. If a bond has a stated rate of 8% and is discounted at 8%, then the proceeds received at
issuance will be
a. equal to the par value of the bonds.
b. greater than the par value of the bonds.
c. less than the par value of the bonds.
d. zero.
Ans: A, SO: 5, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
52. Kimble Company is about to issue $800,000 of 5-year bonds, with a stated rate of interest
of 10%, payable semiannually. The market rate for such securities is 12%. How much can
Kimble expect to receive for the sale of these bonds?
a. $741,119
b. $800,000
c. $865,888
d. None of these
53. Jarvis Company issued $100,000 of 5-year bonds, with a stated rate of interest of 8%,
payable semiannually. The market rate for such securities is 10%. How much did Jarvis
receive from the sale of these bonds?
a. $92,278
b. $100,000
c. $108,111
d. None of these
54. Garcia Company is about to issue $300,000 of 8-year bonds paying a 12% interest rate
with interest payable semiannually. The discount rate for such securities is 10%. Below
are available time value of money factors that Garcia uses to calculate compound interest.
8 periods, 16 periods, 8 periods, 16 periods,
10% 5% 12% 6%
Present Value of 1 0.46651 0.45811 0.40388 0.39365
Future Value of 1 2.14359 2.18287 2.47596 2.54035
Present Value of an Annuity of 1 5.33493 10.83777 4.96764 10.10590
Future Value of an Annuity of 1 11.43589 23.65749 12.29969 15.67253
To the closest dollar, how much can Garcia expect to receive for the sale of these bonds?
a. $319,339
b. $229,371
c. $332,513
d. $540,000
Ans: C, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
55. Gomez Company is about to issue $400,000 of 10-year bonds paying an 8% interest rate
with interest payable semiannually. The discount rate for such securities is 10%. Below
are available time value of money factors that Gomez uses to calculate compound
interest.
10 periods, 20 periods, 10 periods, 20 periods,
8% 4% 10% 5%
Present Value of 1 0.46319 0.45639 0.38554 0.37689
Future Value of 1 2.15892 2.19112 2.59374 2.65330
Present Value of an Annuity of 1 6.71008 13.59033 6.14457 12.46221
Future Value of an Annuity of 1 14.48656 29.77808 15.93743 33.06595
To the closest dollar, how much can Gomez expect to receive for the sale of these bonds?
a. $350,151
b. $292,637
c. $800,000
d. $1,405,503
Ans: A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
56. A higher discount rate produces

a. a smaller present value.
b. a higher present value.
c. the same present value.
d. a greater length of time.
Ans: A, SO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
57. Which of the following is not necessary to know when computing the present value of an
annuity?
a. The discount rate
b. The amount of the periodic receipts or payments
c. The number of discount periods
d. The probability of receiving the amount due
Ans: D, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
Answers to Multiple Choice Questions
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
11. b 18. b 25. d 32. d 39. b 46. b 53. a
12. b 19. a 26. b 33. d 40. b 47. d 54. c
13. d 20. c 27. a 34. c 41. a 48. a 55. a
14. d 21. a 28. d 35. b 42. b 49. b 56. a
15. b 22. b 29. d 36. c 43. c 50. a 57. d
16. b 23. c 30. d 37. d 44. c 51. a
17. d 24. a 31. a 38. c 45. a 52. a
EXERCISES
Ex. 58
(a) What is the present value of $80,000 due 7 years from now, discounted at 9%?
(b) What is the present value of $120,000 due 5 years from now, discounted at 12%?
Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
Solution 58 (4 min.)
Use Table 1.
(a) $80,000 .54703 (7 periods and 9%) = $43,762.40
(b) $120,000 .56743 (5 periods and 12%) = $68,091.60
Ex. 59
Lane Company is considering an investment which will return a lump sum of $600,000 six years
from now. What amount should Lane Company pay for this investment to earn an 8% return?
Use Table 1.
$600,000 .63017 (6 periods and 8%) = $378,102
Ex. 60
Oakes Company earns 12% on an investment that will return $300,000 eleven years from now.
What is the amount that Oakes Company should invest now to earn this rate of return?
Use Table 1.
$300,000 .28748 (11 periods and 12%) = $86,244
Ex. 61
Resch Company sold a three-year, $150,000, zero interest-bearing note receivable to Prior
Company. Prior Company wishes to earn 10% over the remaining 2 years of the note. How much
cash will Resch Company receive upon sale of the note?
Use Table 1.
$150,000 .82645 (2 years and 10%) = $123,968
Ex. 62
Tierney Company issues a three-year, zero interest-bearing note of $60,000. The interest rate
used to discount the zero interest-bearing note is 5%. What are the cash proceeds that Tierney
Company should receive?
Use Table 1.
$60,000 .86384 (3 periods and 5%) = $51,830
Ex. 63
If Betty Jenks invests $22,062 now she will receive $60,000 at the end of 13 years. What annual
rate of return will Betty earn on her investment?
Use Table 1.
8% $60,000 .3677 (8% and 13 periods) = $22,062
Ex. 64
Jose Martinez wants to buy a car in three years. He will need $2,000 for a down payment. The
annual interest rate is 9%. How much money must Jose invest today for the purchase?
Use Table 1.
$2,000 .77218 = $1,544.36
Ex. 65
Kim Black plans to buy a surround sound stereo for $1,600 after 3 years. If the interest rate is 6%,
how much money should Kim set aside today for the purchase?
Use Table 1.
$1,600 .83962 = $1,343.39
Ex. 66
Ken Grand has just won the lottery and will receive an annual payment of $50,000 every year for
the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings?
Use Table 2.
$50,000 9.81815 = $490,907.50
Ex. 67
DMV leases a building for 20 years. The lease requires 20 annual payments of $10,000 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?
Use Table 2.
$10,000 + ($10,000 8.36492) = $93,649.20
Ex. 68
Frye Company is considering investing in an annuity contract that will return $75,000 annually at
the end of each year for 20 years. What amount should Frye Company pay for this investment if it
earns an 8% return?
Use Table 2.
$75,000 9.81815 (20 periods and 8%) = $736,361
Ex. 69
Sarah Denny purchased an investment for $53,680.64. From this investment, she will receive
$8,000 annually for the next 10 years starting one year from now. What rate of interest will Sarah
be earning on her investment?
Use Table 2.
Answer: 8%
$53,680.64 $8,000 = 6.71008 (10 periods and 8%) = 6.71008
Ex. 70
You are purchasing a car for $20,000, and you obtain financing as follows: $2,000 down
payment, 12% interest, semiannual payments over 5 years.
Instructions
Compute the payment you will make every 6 months.
$20,000 cost $2,000 down payment = $18,000
Payment 7.36009 = $18,000
Payment = $18,000/7.36009 = $2,445.62
Ex. 71
Sanford Corporation is considering several investments.
Instructions
(a) One investment returns $15,000 per year for 5 years and provides a return of 10%. What is
the cost of this investment?
(b) Another investment cost $70,000 and returns a certain amount per year for 10 years,
providing an 8% return. What amount is received each year?
(c) A third investment costs $90,000 and returns $13,215 each year for 15 years. What is the
rate of return on this investment?
Ans: N/A, SO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
(a) $15,000 3.79079 = $56,861.85
(b) Receipt 6.71008 = $70,000; Receipt = $70,000/6.71008 = $10,432.07
(c) $13,215 Factor = $90,000; Factor = $90,000/$13,215 = 6.81044
6.81044 is approximately the factor for 15 years, 12%
Ex. 72
Rayburn Company receives a $90,000, 6-year note bearing interest of 8% (paid annually) from a
customer at a time when the discount rate is 9%. What is the present value of the note received
by Rayburn Company?
Present value of principal to be received at maturity:

$90,000 .59627 (PV of $1 due in 6 periods
at 9% from Table 1)................................................................................ $53,664.30
Present value of interest to be received annually
over the term of the note: $7,200 4.48592
(PV of $1 due each period for 6 periods at
9% from Table 2).................................................................................... 32,298.62
Present value of note received...................................................................... $85,962.92
Ex. 73
Danny Shannon owns a garage and is contemplating purchasing a tire retreading machine for
$20,350. After estimating costs and revenues, Danny projects a net cash flow from the retreading
machine of $3,500 annually for 8 years. Danny hopes to earn a return of 11% on such
investments. What is the present value of the retreading operation? Should Danny Shannon
purchase the retreading machine?
Discount rate from Table 2 is 5.14612. Present value of 8 payments of $3,500 each discounted at
11% is therefore $18,011.42 ($3,500 5.14612). Danny Shannon should not purchase the tire
retreading machine because the present value of the future cash flows is less than the purchase
price of the retreading machine.
Ex. 74
Atkins Company is considering purchasing equipment. The equipment will produce the following
cash flows: Year 1, $20,000; Year 2, $25,000; Year 3, $40,000. Atkins requires a minimum rate of
return of 12%. What is the maximum price Atkins should pay for this equipment?
To determine the present value of the future cash flows, discount the future cash flows at 12%
using Table 1.
Year 1 ($20,000 .89286) = $17,857.20

Year 2 ($25,000 .79719) = 19,929.75
Year 3 ($40,000 .71178) = 28,471.20
Present value of future cash flows 66,258.15
To achieve a minimum rate of return of 12%, Atkins Company should pay no more than
$66,258.15. If Atkins pays less than $66,258.15 its rate of return will be greater than 12%.
Ex. 75
Tatum Company issued $500,000, 10%, 2-year bonds which pay interest semiannually. Compute
the amount at which the bonds would sell if investors required a rate of return of 8%.
Present value of principal
$500,000 .85480 (Table 1, 4 periods 4%).................................... $427,400
Present value of interest payments
$500,000 .05 = $25,000
$25,000 3.62990 (Table 2, 4 periods 4%).................................... 90,748
Proceeds from issuance of bonds ............................................................. $518,148
Ex. 76
Hamlin Company issued 9%, 5-year, $1,000,000 par value bonds that pay interest semiannually
on October 1 and April 1. The bonds are dated April 1, 2010, and are issued on that date. The
market rate of interest for such bonds on April 1, 2010, is 8%. What cash proceeds did Hamlin
Company receive from issuance of the bonds?
Ans: N/A, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC:
Present Value of the Interest Payment:
$1,000,000 9% 6/12 = $45,000
$45,000 PV of 1 due periodically for 10 periods at 4%
$45,000 8.11090 (Table 2) = $364,991
Present Value of the Principal:

$1,000,000 PV of 1 due in 10 periods at 4%
$1,000,000 .67556 (Table 1) = $675,560
Proceeds = $364,991 + $675,560 = $1,040,551
COMPLETION STATEMENTS
77. ___________ interest is computed on the principal and on any interest earned that has
not been paid or withdrawn.
Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem
78. The process of determining the present value is referred to as _________________ the
future amount.
79. A series of equal dollar amounts to be received or paid periodically are ______________.
80. The _____________________ of an annuity is the value now of a series of future receipts
or payments.
81. To compute the present value of a bond, both the _______________ payments and the
________________ amount must be discounted.
Answers to Completion Statements

77. Compound
78. discounting
79. annuities
80. present value
81. interest, principal
MATCHING
82. Match the items below by entering the appropriate code letter in the space provided.
A. Annuities D. Present value of a single amount

B. Discounting E. Present value of an annuity
C. Compound interest
_____ 1. The value today of a future amount to be received or paid.
_____ 2. A series of equal dollar amounts to be received or paid periodically.
_____ 3. Return on principal plus interest for two or more periods.
_____ 4. Value today of a series of future amounts to be received or paid.
_____ 5. The process of determining the present value of a future amount.

Answers to Matching
1. D 4. E
2. A 5. B
3. C

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APPENDIX C

TIME VALUE OF MONEY

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOMS TAXONOMY

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion MA = Matching

CHAPTER STUDY OBJECTIVES

6. A higher discount rate produces a higher present value.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

14. Present value is based on

56. A higher discount rate produces

Answers to Multiple Choice Questions

Present value of principal to be received at maturity:

Year 1 ($20,000 .89286) = $17,857.20

Present Value of the Principal:

Proceeds = $364,991 + $675,560 = $1,040,551

Answers to Completion Statements

A. Annuities D. Present value of a single amount

_____ 1. The value today of a future amount to be received or paid.

_____ 2. A series of equal dollar amounts to be received or paid periodically.

_____ 3. Return on principal plus interest for two or more periods.

_____ 4. Value today of a series of future amounts to be received or paid.

_____ 5. The process of determining the present value of a future amount.

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