,APPENDIX B: PROBLEM MATERIAL
1) Explain what is meant by the "time value of money." Provide examples.
2) Explain how compound interest applies to the time value of money.
3) Required:
Use Table PV–1 and Table FA–1 to determine the answers to the following.
(A) How much must be invested now for 5 periods at 6% to amount to $15,000?
(B) How much is $3,000 invested now at 8% in 8 periods worth?
(C) How much is $25,000 compounded semi-annually at 12% for 4 years?
4) Joan is 60 years old and wishes to retire. She needs to have $48,000 a year plus her social
security to live in the style she is accustomed to. She would like to have enough money in her
retirement account, which earns 5% compounded annually, to support her for the next 20 years.
Required:
How much must be in the fund if she takes the first payment at year-end?
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,5) Powers Company wishes to issue $2,000,000 of 8%, 10-year bonds that pay interest
semi-annually. The current market rate is 12%.
Required:
What amount should the bonds sell for?
6) Sam Rivers has $3,000 to invest. He must decide whether to invest this money for five
years at 10% compounded semi-annually or at 12% compounded annually.
Required:
Which option should he select?
7) Barbara wants to purchase a car.
Required:
How long will it take Barbara to accumulate $23,265 to buy a car if she invests $15,000 at 5%?
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, 8) On January 1, Year 1, Paul Corporation purchases equipment. As full payment for this
equipment, Paul issues a $90,000 installment note payable, due in three annual installments of
$30,000, beginning on December 31, Year 1. This note makes no mention of interest charges.
Assume that a realistic interest annual rate for financing equipment over a three-year period
currently is 10%.
Required:
(A) Compute the present value of the installment note.
(B) Complete the amortization table shown below to allocate the amount of each installment
payment between interest expense and reduction in the principal amount of this obligation.
(Round your calculations to whole numbers.)
Payment Date Annual Interest Reduction in Unpaid
Payment Expense Unpaid Balance
Balance
Issuance
December 31, Year 1
December 31, Year 2
December 31, Year 3
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1) Explain what is meant by the "time value of money." Provide examples.
2) Explain how compound interest applies to the time value of money.
3) Required:
Use Table PV–1 and Table FA–1 to determine the answers to the following.
(A) How much must be invested now for 5 periods at 6% to amount to $15,000?
(B) How much is $3,000 invested now at 8% in 8 periods worth?
(C) How much is $25,000 compounded semi-annually at 12% for 4 years?
4) Joan is 60 years old and wishes to retire. She needs to have $48,000 a year plus her social
security to live in the style she is accustomed to. She would like to have enough money in her
retirement account, which earns 5% compounded annually, to support her for the next 20 years.
Required:
How much must be in the fund if she takes the first payment at year-end?
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,5) Powers Company wishes to issue $2,000,000 of 8%, 10-year bonds that pay interest
semi-annually. The current market rate is 12%.
Required:
What amount should the bonds sell for?
6) Sam Rivers has $3,000 to invest. He must decide whether to invest this money for five
years at 10% compounded semi-annually or at 12% compounded annually.
Required:
Which option should he select?
7) Barbara wants to purchase a car.
Required:
How long will it take Barbara to accumulate $23,265 to buy a car if she invests $15,000 at 5%?
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, 8) On January 1, Year 1, Paul Corporation purchases equipment. As full payment for this
equipment, Paul issues a $90,000 installment note payable, due in three annual installments of
$30,000, beginning on December 31, Year 1. This note makes no mention of interest charges.
Assume that a realistic interest annual rate for financing equipment over a three-year period
currently is 10%.
Required:
(A) Compute the present value of the installment note.
(B) Complete the amortization table shown below to allocate the amount of each installment
payment between interest expense and reduction in the principal amount of this obligation.
(Round your calculations to whole numbers.)
Payment Date Annual Interest Reduction in Unpaid
Payment Expense Unpaid Balance
Balance
Issuance
December 31, Year 1
December 31, Year 2
December 31, Year 3
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