ACC 331 CH 5 SMARTBOOK

Milo decides to invest $1,500 in a savings account every year at the beginning of the year for 10 years. Assuming an interest rate of 7%, how much will Milo have at the end of the 10th year? (Round your answer to the nearest dollar.)

$1,500 X 14.7836 (i.e., FVAD, the future value of annuity due, factor at 7% for 10 periods) = $22,175

George will deposit $2,000 in a savings account at the beginning of each year for 8 years. Assuming the interest rate is 5%, how much money will George have in the account at the end of year 8? Round your answer to the nearest dollar.

$2,000 x 10.0266 (i.e., FVAD, the future value of annuity due, factor at 5% for 8 periods) = $20,053

The value of Investment A at the end of year 5 is $20,000. Assuming that interest is compounded annually, and the interest rate is 8%, what is the present value of this investment at the beginning of year 1?

$20,000 x 0.68058 = 13,612

Shadow Corp. would like to invest enough cash to have $500,000 at the end of year 3. Assume the interest on the investment is compounded annually at 8%. How much money should Shadow Corp invest today to have $500,000 at the end of year 3?

$500,000 x 0.79383 = $396,915

James would like to deposit enough money in a savings account to have $8,000 at the end of year 3. Assuming the investment will earn 5% compounded annually, what amount should James deposit in the savings account today? Round your answer to the nearest dollar.

$8,000(1.053)$8,000(1.053) = $6,911

Which of the following are the four variables in present value annuity problems?

-The payment amount -The interest rate -The number of periods -The present value

Which of the following are monetary liabilities? (Select all that apply.)

-note payable at 6% interest due in 6 months -bond payable at 4% interest due in 20 years -accounts payable

Which of the following are monetary assets? (Select all that apply.)

-note receivable -cash -accounts receivable

Which of the following are required to compute the present value of a known future amount? (Select all that apply.)

-number of compounding periods -future value -interest rate

Over a 5-year period, simple interest is ______ compound interest on the same note.

less than

Sharon receives $100 at the end of each month for 5 years. The type of annuity she is receiving is called a(n)

ordinary annuity.

The formula "future value divided by the quantity (1 + i)n" is the formula for __________ value.

present

Karr Company borrowed $100,000 by signing a 5-year note payable at 8% interest. At the end of year 5, Karr will repay the bank $146,933. At the time the note is signed, the $100,000 is referred to as the ______ of the note payable.

present value

Most monetary assets are valued at the __________ value of ___________ cash flows.

present; future

Most monetary liabilities are valued at the __________ value of __________ cash flows.

present; future

We value most receivables and payables at the ___________ value of ____________ cash flows, reflecting an appropriate time value of money.

present; future

On January 1, Gino signs a note payable for $10,000. The note has an interest rate of 3%. If Gino repays $10,300 at the end of year 1, the interest is ______ interest.

simple

The future value of an ordinary annuity table is used when calculating

the future value of a series of payments.

The __________ __________ of money concept means that money invested today will grow to a larger amount in the future.

time value

The difference between $100 invested now and $105 at the end of year 1 represents the

time value of money.

Cindy would like to deposit enough money in a savings account to have $10,000 at the end of year 4. Assuming the investment will earn 5% compounded annually, what amount should Cindy deposit in the savings account today? Round your answer to the nearest dollar.

$10,000(1.054)$10,000(1.054) = $8,227

Polly sells goods to customers in exchange for a $10,000 noninterest-bearing note due in 3 years. The interest rate on this type of loan is 6%. What is the present value of the note? Round your answer to the nearest dollar.

$10,000/(1.063) = $8,396

Tortoise Corp. would like to invest enough cash to have $100,000 at the end of year 5. Assume the interest on the investment is compounded annually at 10%. How much does Tortoise need to invest on January 1 of Year 1?

$100,000 x 0.62092 = $62,092

Karel sells goods to customers in exchange for a $100,000 noninterest-bearing note due in 2 years. The interest rate on this type of loan is 8%. What is the present value of the note?

$100,000/(1.082) = $85,734

On January 1, Biggs Corp. borrowed $20,000 with 4% simple interest. What is the amount of interest that must be paid at year-end?

$800

Which of the following is an example of a monetary asset?

Accounts receivable

How are most monetary assets and liabilities valued?

At the present value of future cash flows.

Sandra borrows $1,000 at an interest rate of 12%. If Sandra pays $133 interest at year-end, the interest rate is ______ interest.

Compound

Which of the following results in increasingly larger amounts of interest for each period of the investment?

Compound interest

Which of the following situations would involve the calculation of the future value of an ordinary annuity?

Depositing an amount to a savings account each month that will grow to purchase a car in 5 years.

What is the formula to calculate future value of an amount "I"?

FV = I(1+i)^n

Which of the following formulas represent the present value?

FV divided by (1 + i)^n

True or false: The formula to calculate future value 2 years in the future is the amount invested times the interest rate.

False

Alex invested $10,000 in a savings account for 4 years at 10% compounded annually. What is the future value of Alex's investment?

Future value = $10,000 x (1.4641) = $14,641

The first cash flow of an ordinary annuity occurs when?

One compounding period after the agreement begins.

$1,000 invested today at 10% compounded annually will grow to $1,100 at the end of one year or $1,210 at the end of two years. What is the initial $1,000 referred to as?

Present value

Multiplying an initial investment times both the applicable interest rate and the period of time for which the money is used is referred to as what?

Simple interest

Assume you borrow $10,000 from the bank and promise to repay the amount in 5 equal installments beginning one year from today. The stated interest rate on the loan is 5%. What is the unknown variable in this problem?

The payment amount

Carol expects to receive $1,000 at the end of each year for 5 years. The annuity has an interest rate of 10%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is

The present value ordinary annuity factor of 10% for 5 periods is 3.79079. $1,000 x 3.79079 = $3,791

Sam expects to receive $2,000 at the end of each year for 3 years. The annuity has an interest rate of 12%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is

The present value ordinary annuity factor of 12% for 3 periods is 2.40183. $2,000 x 2.40183 = $4,804.

A(n) __________ is a series of equal payments received or paid at equal intervals.

annuity

On a financial calculator, the PMT key is used to input the

annuity payment.

A series of payments in the same amount is referred to as

annuity.

The rate at which money actually grows during a year is called the ______ rate.

effective

Norton loans a customer $500 on January 1. On July 1 of the same year, the customer must repay Norton $525. The amount of interest earned by Norton is $________.

25

Jennifer invested $20,000 in a savings account for 3 years at 6% compounded annually. What is the future value of Jennifer's investment?

Future value = $20,000 x (1.06)3 = $23,820

Lenny borrowed $10,000 on a 5-year interest bearing note with an interest rate of 10%. At the end of 5 years, Lenny must repay the bank $16,105. Based on the amount that must be repaid, interest was calculated with what type of interest rate?

compound interest simple interest would have yielded total interest of $10,000x10%=$1,000 x 5 years = $5,000

Interest on the initial investment plus interest calculated on the previously earned interest is called ____________ interest.

compound or compounding

The rate at which money will actually grow during a full year is referred to as the

effective rate.

Joshua would like to deposit $12,000 in a savings account today. He is interested in knowing what that investment will be worth when he retires at age 62. Joshua is interested in calculating what amount?

future value

The amount of money that a dollar will grow to at some point in the future is known as the

future value.

Jim borrows $1,000 and has to repay $1,100 at the end of the year. The $100 payment is referred to as ________.

interest

The amount of money paid or received in excess of the amount of money borrowed or lent is referred to as what?

interest

To solve for the present value of a single sum, you need to know the future value, the number of compounding periods, and the _____________ ____________.

interest rate