ACG 4101 Exam 2 Chapters 5-7 Question
and answers already passed
Simple Interest Formula - correct answer ✔Initial Investment x Interest Rate
x Period of time (x/12)
Compound Interest - correct answer ✔includes interest on both principle and
interest accumulated in previous periods. i.e. semiannually, quarterly, monthly
Cindy invested $1,000 in a savings account paying 10% interest compounded
twice a year. What will be her investment balance at the end of the year?
What is the effective annual interest rate? - correct answer ✔Divide 10% by
2 to make it 5% interest (annual rate divided by 2 periods of 6 months).
Initial deposit after 6 months: 1,000 x 5% = 50
End of year 1: 1,050 x 5% = 52.50
Total balance after 1 year: 1,102.50
Single Cash Flow Formulas
- Future Value
- Present Value - correct answer ✔- Future Value = PV x FV $ Factor
- Present Value = FV x PV $ Factor
- Future value entrails the addition of interest
- Present value entails the removal of interest
Cindy invested $1,000 in a savings account for 3 years paying 10% interest
compounded annually. What can she receive at the end of year 3? - correct
answer ✔FV = PV x FV $ Factor
,FV = 1,000 x 1.331 (from table)
FV = 1,331
or...
1,000 x 1.10 [1.00+.10] then multiply it be 3 years
1,000 x 1.10 x 1.10 x 1.10 = 1,331
What is the present value of 1,331 received at the end of 3 years (10% annual
compounding interest)? - correct answer ✔PV = FV x PV $ Factor
PV = 1,331 x .75131
PV = 1,000
The Stridewell Wholesale Shoe Company recently sold a large order of shoes
to Harmon Sporting Goods. Terms of the sale require Harmon to sign a
noninterest-bearing note of $60,500 w/payment due in 2 years. What is the
price of the shoes? Assume the market interest rate is 10%. - correct answer
✔PV = FV x PV $ Factor
PV = 60,500 x .8265
PV = 50,000
The Versa Tile Company purchased a delivery truck on February 1, 2016. The
agreement required Versa Tile to pay the purchase price of $44,000 on
February 1, 2017. Assuming an 8% rate of interest, to calculate the price of
the truck Versa Tile would multiply $44,000 by the:
a. future value of an ordinary annuity of $1.
b. present value of $1
c. present value of an ordinary annuity of $1
d. future value of $ - correct answer ✔b
,PV = FV x PV $ factor
PV = 44,000 x PV $ Factor
Turp and Tyne Distillery is considering investing in a two-year project. The
company's required rate of return is 10%. The present value of $1 for one
period at 10% is .909 and .826 for two periods at 10%. The project is
expected to create cash flows, net of taxes, of $240,000 in the first year, and
$300,000 in the second year. The distillery should invest in the project if the
project's cost is less than or equal to:
a. 540,000
b. 490,860
c. 465,960
d. 446,040 - correct answer ✔c
PV = 240,000 x .909
PV = 218,160
PV = 300,000 x .826
PV = 247,800
218,160 + 247,800 = 465,960
Annuity
- Ordinary Annuity
- Annuity Due - correct answer ✔A series of cash flows of same amount
received or paid e/period.
- Ordinary A.: cash flow occurs at the end of e/period. The first cash flow is
made one compounding period after the date on which agreements begins.
The final cash flow takes place on the last day covered by the agreement.
, - Annuity D.: cash flow occurs at the beginning of e/period. First payment is
made on the first day of the agreement. And the last payment is made 1
period before the end of the agreement.
Valuing Annuity
- Future Value of equal cash flows
- Present Value of equal cash flows - correct answer ✔- Future Value = Ann
x FV Ann Factor. (If lump sum occurs at the end or after annuity payments. o
o o O)
- Present Value = Ann x PV Ann Factor. (If lump sum occurs 1st or before
annuity payments. O o o o )
Sally Rogers wants to accumulate a sum of money to pay for graduate school.
Rather than investing a single amount today that will grow to a future value,
she decides to invest $10,000 a year over the next 3 years in a savings
account paying 10% interest compounded annually. She decides to make the
1st payment to the bank 1 year from today. How much will Sally get at the end
of the 3 years? - correct answer ✔Looking for FV b/c you are building up to a
lump sum. Ordinary annuity b/c she wants to see what she gets at the end of
the period.
FVA = Ann x FV Ordinary Ann Factor
FVA = 10,000 x 3.31
FVA = 33,100
Sally Rogers wants to accumulate a sum of money to pay for graduate school.
She wants to invest a single amount today in a savings account earning 10%
interest compounded annually that is equivalent to investing $10,000 at the
end of e/of the next 3 years. How much does she need to invest today? -
correct answer ✔Looking for PV b/c she needs to know what she's investing
today.
Ordinary Annuity b/c she's investing at the end of e/period.
and answers already passed
Simple Interest Formula - correct answer ✔Initial Investment x Interest Rate
x Period of time (x/12)
Compound Interest - correct answer ✔includes interest on both principle and
interest accumulated in previous periods. i.e. semiannually, quarterly, monthly
Cindy invested $1,000 in a savings account paying 10% interest compounded
twice a year. What will be her investment balance at the end of the year?
What is the effective annual interest rate? - correct answer ✔Divide 10% by
2 to make it 5% interest (annual rate divided by 2 periods of 6 months).
Initial deposit after 6 months: 1,000 x 5% = 50
End of year 1: 1,050 x 5% = 52.50
Total balance after 1 year: 1,102.50
Single Cash Flow Formulas
- Future Value
- Present Value - correct answer ✔- Future Value = PV x FV $ Factor
- Present Value = FV x PV $ Factor
- Future value entrails the addition of interest
- Present value entails the removal of interest
Cindy invested $1,000 in a savings account for 3 years paying 10% interest
compounded annually. What can she receive at the end of year 3? - correct
answer ✔FV = PV x FV $ Factor
,FV = 1,000 x 1.331 (from table)
FV = 1,331
or...
1,000 x 1.10 [1.00+.10] then multiply it be 3 years
1,000 x 1.10 x 1.10 x 1.10 = 1,331
What is the present value of 1,331 received at the end of 3 years (10% annual
compounding interest)? - correct answer ✔PV = FV x PV $ Factor
PV = 1,331 x .75131
PV = 1,000
The Stridewell Wholesale Shoe Company recently sold a large order of shoes
to Harmon Sporting Goods. Terms of the sale require Harmon to sign a
noninterest-bearing note of $60,500 w/payment due in 2 years. What is the
price of the shoes? Assume the market interest rate is 10%. - correct answer
✔PV = FV x PV $ Factor
PV = 60,500 x .8265
PV = 50,000
The Versa Tile Company purchased a delivery truck on February 1, 2016. The
agreement required Versa Tile to pay the purchase price of $44,000 on
February 1, 2017. Assuming an 8% rate of interest, to calculate the price of
the truck Versa Tile would multiply $44,000 by the:
a. future value of an ordinary annuity of $1.
b. present value of $1
c. present value of an ordinary annuity of $1
d. future value of $ - correct answer ✔b
,PV = FV x PV $ factor
PV = 44,000 x PV $ Factor
Turp and Tyne Distillery is considering investing in a two-year project. The
company's required rate of return is 10%. The present value of $1 for one
period at 10% is .909 and .826 for two periods at 10%. The project is
expected to create cash flows, net of taxes, of $240,000 in the first year, and
$300,000 in the second year. The distillery should invest in the project if the
project's cost is less than or equal to:
a. 540,000
b. 490,860
c. 465,960
d. 446,040 - correct answer ✔c
PV = 240,000 x .909
PV = 218,160
PV = 300,000 x .826
PV = 247,800
218,160 + 247,800 = 465,960
Annuity
- Ordinary Annuity
- Annuity Due - correct answer ✔A series of cash flows of same amount
received or paid e/period.
- Ordinary A.: cash flow occurs at the end of e/period. The first cash flow is
made one compounding period after the date on which agreements begins.
The final cash flow takes place on the last day covered by the agreement.
, - Annuity D.: cash flow occurs at the beginning of e/period. First payment is
made on the first day of the agreement. And the last payment is made 1
period before the end of the agreement.
Valuing Annuity
- Future Value of equal cash flows
- Present Value of equal cash flows - correct answer ✔- Future Value = Ann
x FV Ann Factor. (If lump sum occurs at the end or after annuity payments. o
o o O)
- Present Value = Ann x PV Ann Factor. (If lump sum occurs 1st or before
annuity payments. O o o o )
Sally Rogers wants to accumulate a sum of money to pay for graduate school.
Rather than investing a single amount today that will grow to a future value,
she decides to invest $10,000 a year over the next 3 years in a savings
account paying 10% interest compounded annually. She decides to make the
1st payment to the bank 1 year from today. How much will Sally get at the end
of the 3 years? - correct answer ✔Looking for FV b/c you are building up to a
lump sum. Ordinary annuity b/c she wants to see what she gets at the end of
the period.
FVA = Ann x FV Ordinary Ann Factor
FVA = 10,000 x 3.31
FVA = 33,100
Sally Rogers wants to accumulate a sum of money to pay for graduate school.
She wants to invest a single amount today in a savings account earning 10%
interest compounded annually that is equivalent to investing $10,000 at the
end of e/of the next 3 years. How much does she need to invest today? -
correct answer ✔Looking for PV b/c she needs to know what she's investing
today.
Ordinary Annuity b/c she's investing at the end of e/period.
