Chapter 6 Questions

on june 1, 2017, walsh company sold some equipment to fischer company. the two companies entered into an installment sales contract at a rate of 8%. the contract required 8 equal payments with the first payment due on june 1, 2017. what types of compound interest table is appropriate for this situation? a. present value of an annuity due of 1 table b. present value of an ordinary annuity of 1 table c. future value of an ordinary annuity of 1 table d. future value of 1 table

A

what amount should Spencer Forman have in his 6% bank account today before withdrawal if he needs $3,000 each year for three years with the first withdrawal to be made today and each subsequent withdrawal at one-year intervals? (He is to have exactly a zero balance bank account after the third withdrawal) a. $3,000 + ($3,000 x 0.94340) + ($3,000 x 0.89000) b. ($3,000/0.83962) x 3 c. ($3,000 x 0.94340) + ($3,000 x 0.89000) + ($3,000 x 0.83862) d. ($3,000/0.94340) x 3

A

which of the following transactions would best use the present value of an annuity due of 1 table. a. diamond bar, inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year b. Michener Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years

A

Sharon Walsh has developed an patented a computer chip that allows telecommunications in race cars to become more efficient. She agrees to sell the patent to Pensca for five annual payments of $50,000 each. the payments are to begin three years from today. given an annual rate of 6%, what is the present value of the five payments? a. $176,839 b. $187,450 c. $210,618 d. $218,820

B

Jeanie Pearson plans to buy a golf course in 10 year. Because of cash flow problems, Jeanie is able to budget deposits of $900,000 that are expected to earn 10% annually only at the end of the seventh, eighth, ninth, and tenth periods. What future amount will Jeanie accumulate at the end of the tenth year? a. $3,600,000 b. $3,960,000 c. $4,176,900 d. $ 6,902,631

C

bob geiger plans on going on vacation to asia in four years. the trip will cost $4,000. he proposes to finance the trip by investing a sum of money now at 9% compound interest. how much should Bob invest now in order to obtain his goal $4,000? a. $2,474.67 b. $2,654.35 c. $2,833.72 d. $3,088.72

C

if J.J. Morse put $1,000 in a 12% savings account today, what amount of cash would be available 3 years from now? a. $1,000 x .71178 b. $1,000 x .71178 x 3 c. $1,000/.71178 d. $1,000/.89286) x 3

C

which of the following tables would show the largest value for an interest? a. future value of 1 table b. present value of 1 table c. future value of an ordinary annuity of 1 table d. present value of an ordinary annuity of 1 table

C

Kimberly Nelson, a computer programmer, wishes to create her own retirement fund. Kimberly deposits $4,000 today in a fixed rate savings account that earns 5% interest. She plans to deposit $4,000 every year for the next 24 years (total of 25 deposits). How much cash will she have accumulated in her retirement account when she retires in 25 years? a. $186,908 b. $190,908 c. $194,908 d. $200,454

D

what amount should be deposited in a bank today at an interest rate of 10% to grow to $2,000 four years from today? a. $2,000/0.68301 b. $2,000 x 0.90909 x 3 c. ($2,000 x 0.90909) + ($2,000 x 0.82645) + ($2,000 x 0.75132) + ($2,000 x 0.68301) d. $2,000 x 0.68301

D

an annuity requires that periodic rents always be the same even though the interval between the rents may vary

false

the future value of a deferred annuity is normally greater than the future value of an annuity not deferred

false; because there is no accumulation or investment on which interest may accrue, the future value of a deferred annuity is the same as the future value of an annuity not deferred

the ordinary annuity table may be used to compute the periodic rents when the desired future value and the present value of the annuity are not known

false; id the desired future value or present value of an annuity are not known, the periodic rents cannot be computed

in the formula for compound interest, the number of period refers to the number of months an obligation will be outstanding

false; in the formula for compound interest the number of periods refers to the number of times interest is compounded. interest is generally in terms of an annual rate; however, in many business circumstances, the compounding period is less than a year (daily, monthly, quarterly, semiannually).

if interest is compounded quarterly and the annual interest rate is 8%, the compounding period interest rate is 4%

false; in this case the compounding interest rate is 2% rather than 4%. this is computed by dividing the annual rate (8%) by the number of compounding periods per year (4)

the major difference between compound interest and simple interest lies in the fact that compound interest is computed twice each year, whereas simple interest is computed only once

false; simple interest is the term used to describe interest that is computed on the amount of the principal only. compound interest is the term used to describe interest that is compounded on principal and on any interest earned that has not been paid or withdrawn

the number of rents exceeds the number of discount periods under the present value of an ordinary annuity

false; the present value of an ordinary annuity is the present value of a series of rents equal to the number of discount periods

an annuity is classified as an ordinary annuity if the rents occur at the end of the period; it is classified as an annuity due if the rents occur at the beginning of the period

true

periodic interest earnings under an ordinary annuity will always be lower by one period's interest than the interest earned by an annuity due

true

present value is the amount that must be invested now to produce a known future amount

true

present value techniques can be used in valuing receivables and payables that carry no stated interest rate

true

the amount of interest on a $1,000, 6%, 6-month note is the same as the amount of interest on a $1,000, 3%, 1-year note

true

the growth in principal is the same under both compound and simple interest if only one compounding period is involved

true

the present value of an ordinary annuity is the present value of series of rents to be made at equal intervals in the future

true

the valuation of a sum as of an earlier date involves a determination of present value; the valuation of a sum as of a later date involves a determination of a future value

true