,TESTBANK for Accounting Tools for Business Decision Making 8th Edition
Paul D. Kimmel
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, APPENDIX: TEST BANK
TIME VALUE OF MONEY
APPENDIX 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withdrawn.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, 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 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.
To compute the present value of notes and bonds, 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.
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).
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,2 Test Bank
4. Use technological tools to solve time value of money problems. Technological tools, such
as financial calculators and Excel, can be used to solve the same and additional problems as
those solved with time value of money tables. When using a financial calculator, you will 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 it solves for the
unknown element. Particularly useful situations involve interest rates and compounding
periods not presented in the tables. When using Excel, each function will require some
combination of the following inputs: Rate, Nper, Pmt, PV or FV, and Type. The advantage of
Excel is that it allows users to quickly modify inputs to understand how changes in inputs such
as the interest rate might impact the present value.
Difficulties:
Easy: 29
Medium: 50
Hard: 0
Question List by Section
Interest and Future Values
Nature of Interest: 1
Simple Interest
Compound Interest: 2, 13
Future Value of a Single Amount: 3, 14,, 15, 16, 17, 46, 47, 48, 49, 50
Future Value of an Annuity: 4. 18, 19, 20, 21, 22, 51, 52, 53, 54, 55 56, 75, 76
Present Values
Present Value Variables: 5, 6, 23, 24, 25, 77
Present Value of a Single Amount: 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 57, 58, 59, 60, 61,
62, 63
Present Value of an Annuity: 7, 9, 37, 38, 40, 41, 64, 65, 66, 67, 68, 69, 70, 71
Time Periods and Discounting: 30
Present Value of a Long-term Note or Bond: 8, 39, 42, 72, 78
Capital Budgeting Situations: 10, 11, 43, 44, 73
Using Technological Tools: 12, 45, 74
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 3
TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.
Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Nature of Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
2. Compound interest is computed on the principal and any interest earned that has not been
paid or received.
Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
5. The process of determining the present value is referred to as discounting the future
amount.
Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
6. A higher discount rate produces a higher present value.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
7. In computing the present value of an annuity, it is not necessary to know the number of
discount periods.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
8. The present value of a long-term note or bond is a function of two variables.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
10. The decision to make long-term capital investments is best evaluated without recognizing
the time value of money.
Ans: F, LO: 3, Topic: Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
11. In a capital budgeting decision, a positive net present value means the decision to invest
should be accepted.
Ans: T, LO: 3, Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement
Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,4 Test Bank
12. With Excel or 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, Topic: Using Technological Tools, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Technology and Tools, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
15. If $40,000 is put 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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic,
AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 1: ($40,000 × 1.21665)
Dep. × FV of 1, n = 5, i = 4)
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
19. Acme 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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 2: ($30,000 × 12.57789)
(Ann. × FV of annuity, n = 10, i = 5)
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,6 Test Bank
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, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
24. Present value is based on the
a. dollar amount to be received.
b. length of time until the amount is received.
c. interest rate.
d. All of the answers are correct.
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
26. If you can earn an 8% rate of return, what amount would you need to invest to have
$30,000 one year from now?
a. $27,747
b. $27,778
c. $27,273
d. $29,700
Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: ($30,000 ÷ 1.08)
(Dep. ÷ (1 + int. rate)
Solution Using the Present Value of 1 Table 3: ($30,000 × .92593)
(FV × PV of 1 factor, n = 1, i = 8%)
27. If you can earn a 15% rate of return, what amount would you need to invest to have
$15,000 one year from now?
a. $14,852
b. $13,125
c. $12,750
d. $13,044
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: ($15,000 ÷ 1.15)
(Dep. ÷ (1 + int. rate)
Solution Using the Present Value of 1 Table 3: ($15,000 × .86957)
(FV × PV of 1 factor, n = 1, i = 15%)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 7
28. If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its
present value is
a. $1,818.
b. $1,623.
c. $1,802.
d. $2,754.
Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($2,000 × .81162)
(FV × PV of 1, n = 2, i = 11)
29. If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its
present value is
a. $2,519.
b. $2,830.
c. $2,600.
d. $2,820.
Ans: a, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($3,000 × .83962)
(FV × PV of 1, 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, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
31. Suppose you have a winning lottery ticket and 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. 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($3,000,000 × .83962)
(FV × PV of 1, n = 3, i = 6)
32. The amount you must deposit now in your savings account, paying 6% interest, 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($6,000 × .74726)
(FV × PV of 1, n = 5, i = 6)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, 8 Test Bank
33. The amount you must deposit now in your savings account, paying 5% interest, 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($10,000 × .86384)
(FV × PV of 1, n = 3, i = 5)
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, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
35. If Kim Kardashian invests $10,514.81 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($10,514.81 ÷ $30,000 = .35049)
(PV ÷ FV = PV of 1, n = 11, i = 10)
36. Katy Perry 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 Katy. How many years
must Katy wait to receive the $200,000?
a. 10
b. 11
c. 12
d. 13
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($73,540 ÷ 200,000 = .3677)
(PV ÷ FV = PV of 1, n = 13, i = 8)
37. Ryan Seacrest invests $35,516.80 now for a series of $5,000 annual returns beginning one
year from now. Ryan will earn 10% on the initial investment. How many annual payments
will Ryan receive?
a. 10
b. 12
c. 13
d. 15
Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 4: ($35,516.80 ÷ $5,000 = 7.10336)
(PV ÷ Ann. = PV ann., n = 13, i = 10)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
Paul D. Kimmel
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, APPENDIX: TEST BANK
TIME VALUE OF MONEY
APPENDIX 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, 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 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.
To compute the present value of notes and bonds, 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.
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).
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,2 Test Bank
4. Use technological tools to solve time value of money problems. Technological tools, such
as financial calculators and Excel, can be used to solve the same and additional problems as
those solved with time value of money tables. When using a financial calculator, you will 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 it solves for the
unknown element. Particularly useful situations involve interest rates and compounding
periods not presented in the tables. When using Excel, each function will require some
combination of the following inputs: Rate, Nper, Pmt, PV or FV, and Type. The advantage of
Excel is that it allows users to quickly modify inputs to understand how changes in inputs such
as the interest rate might impact the present value.
Difficulties:
Easy: 29
Medium: 50
Hard: 0
Question List by Section
Interest and Future Values
Nature of Interest: 1
Simple Interest
Compound Interest: 2, 13
Future Value of a Single Amount: 3, 14,, 15, 16, 17, 46, 47, 48, 49, 50
Future Value of an Annuity: 4. 18, 19, 20, 21, 22, 51, 52, 53, 54, 55 56, 75, 76
Present Values
Present Value Variables: 5, 6, 23, 24, 25, 77
Present Value of a Single Amount: 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 57, 58, 59, 60, 61,
62, 63
Present Value of an Annuity: 7, 9, 37, 38, 40, 41, 64, 65, 66, 67, 68, 69, 70, 71
Time Periods and Discounting: 30
Present Value of a Long-term Note or Bond: 8, 39, 42, 72, 78
Capital Budgeting Situations: 10, 11, 43, 44, 73
Using Technological Tools: 12, 45, 74
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 3
TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.
Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Nature of Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
2. Compound interest is computed on the principal and any interest earned that has not been
paid or received.
Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
5. The process of determining the present value is referred to as discounting the future
amount.
Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
6. A higher discount rate produces a higher present value.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
7. In computing the present value of an annuity, it is not necessary to know the number of
discount periods.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
8. The present value of a long-term note or bond is a function of two variables.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
10. The decision to make long-term capital investments is best evaluated without recognizing
the time value of money.
Ans: F, LO: 3, Topic: Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
11. In a capital budgeting decision, a positive net present value means the decision to invest
should be accepted.
Ans: T, LO: 3, Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Measurement
Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,4 Test Bank
12. With Excel or 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, Topic: Using Technological Tools, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Technology and Tools, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
15. If $40,000 is put 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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic,
AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 1: ($40,000 × 1.21665)
Dep. × FV of 1, n = 5, i = 4)
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
19. Acme 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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 2: ($30,000 × 12.57789)
(Ann. × FV of annuity, n = 10, i = 5)
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, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
,6 Test Bank
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, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
24. Present value is based on the
a. dollar amount to be received.
b. length of time until the amount is received.
c. interest rate.
d. All of the answers are correct.
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
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, Topic: Present Values, Subtopic: Present Value Variables, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting & Control
26. If you can earn an 8% rate of return, what amount would you need to invest to have
$30,000 one year from now?
a. $27,747
b. $27,778
c. $27,273
d. $29,700
Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: ($30,000 ÷ 1.08)
(Dep. ÷ (1 + int. rate)
Solution Using the Present Value of 1 Table 3: ($30,000 × .92593)
(FV × PV of 1 factor, n = 1, i = 8%)
27. If you can earn a 15% rate of return, what amount would you need to invest to have
$15,000 one year from now?
a. $14,852
b. $13,125
c. $12,750
d. $13,044
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: ($15,000 ÷ 1.15)
(Dep. ÷ (1 + int. rate)
Solution Using the Present Value of 1 Table 3: ($15,000 × .86957)
(FV × PV of 1 factor, n = 1, i = 15%)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, Time Value of Money 7
28. If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its
present value is
a. $1,818.
b. $1,623.
c. $1,802.
d. $2,754.
Ans: b, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($2,000 × .81162)
(FV × PV of 1, n = 2, i = 11)
29. If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its
present value is
a. $2,519.
b. $2,830.
c. $2,600.
d. $2,820.
Ans: a, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($3,000 × .83962)
(FV × PV of 1, 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, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
31. Suppose you have a winning lottery ticket and 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. 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($3,000,000 × .83962)
(FV × PV of 1, n = 3, i = 6)
32. The amount you must deposit now in your savings account, paying 6% interest, 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($6,000 × .74726)
(FV × PV of 1, n = 5, i = 6)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
, 8 Test Bank
33. The amount you must deposit now in your savings account, paying 5% interest, 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($10,000 × .86384)
(FV × PV of 1, n = 3, i = 5)
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, Topic: Present Values, Subtopic: Time Periods and Discounting, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
35. If Kim Kardashian invests $10,514.81 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, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($10,514.81 ÷ $30,000 = .35049)
(PV ÷ FV = PV of 1, n = 11, i = 10)
36. Katy Perry 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 Katy. How many years
must Katy wait to receive the $200,000?
a. 10
b. 11
c. 12
d. 13
Ans: d, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 3: ($73,540 ÷ 200,000 = .3677)
(PV ÷ FV = PV of 1, n = 13, i = 8)
37. Ryan Seacrest invests $35,516.80 now for a series of $5,000 annual returns beginning one
year from now. Ryan will earn 10% on the initial investment. How many annual payments
will Ryan receive?
a. 10
b. 12
c. 13
d. 15
Ans: c, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: Decision-Making, IMA: Reporting & Control
Solution: Use Table 4: ($35,516.80 ÷ $5,000 = 7.10336)
(PV ÷ Ann. = PV ann., n = 13, i = 10)
Copyright © John Wiley & Sons, Inc. (For Instructor Use Only)
