6 Accounting and the Time Value of Money EXERCISES 6.1
EXERCISES
E6-1 (L01) (Using Interest Tables) For each of the following cases, indicate (a) to what rate columns, and (b) to what number of periods you would refer in looking up the interest factor.
E6-2 (L01,2) EXCEL (Simple and Compound Interest Computations) Alan Jackson invests $20,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money.
Instructions
(a) Compute the amount Alan would withdraw assuming the investment earns simple interest.
(b) Compute the amount Alan would withdraw assuming the investment earns interest compounded annually.
(c) Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually.
E6-3 (L02,3,4) EXCEL (Computation of Future Values and Present Values) Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.)
(a) What is the future value of $7,000 at the end of 5 periods at 8% compounded interest?
(b) What is the present value of $7,000 due 8 periods hence, discounted at 6%?
(c) What is the future value of 15 periodic payments of $7,000 each made at the end of each period and compounded at 10%?
(d) What is the present value of $7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?
E6-4 (L03,4) (Computation of Future Values and Present Values) Using the appropriate interest table, answer the following questions. (Each case is independent of the others).
(a) What is the future value of 20 periodic payments of $4,000 each made at the beginning of each period and compounded at 8%?
(b) What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted at 5% compound interest?
(c) What is the future value of 15 deposits of $2,000 each made at the beginning of each period and compounded at 10%?
(d) What is the present value of six receipts of $1,000 each received at the beginning of each period, discounted at 9% compounded interest?
E6-5 (L04) (Computation of Present Value) Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods.
(a) $30,000 receivable at the end of each period for 8 periods compounded at 12%.
(b) $30,000 payments to be made at the end of each period for 16 periods at 9%.
(c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.
E6-6 (L02,3,4) (Future Value and Present Value Problems) Presented below are three unrelated situations.
(a) Dwayne Wade Company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of $12,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 5% per year. What amount will the company receive at the time the lease expires?
(b) Serena Williams Corporation, having recently issued a $20 million, 15-year bond issue, is committed to make annual sinking fund deposits of $600,000. The deposits are made on the last day of each year and yield a return of 10%. Will the fund at the end of 15 years be sufficient to retire the bonds? If not, what will the deficiency be?
(c) Under the terms of his salary agreement, president Rex Walters has an option of receiving either an immediate bonus of $55,000, or a deferred bonus of $70,000 payable in 10 years. Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?
E6-7 (L05) (Computation of Bond Prices) What would you pay for a $100,000 debenture bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a yield of:
(a) 4%? (b) 5%? (c) 6%?
E6-8 (L05) (Computations for a Retirement Fund) Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2021 and continuing through 2024. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2017–2020.
Instructions
(a) How much must the balance of the fund equal on June 30, 2020, in order for Clarence to satisfy his objective?
(b) What are each of Clarence’s contributions to the fund?
E6-9 (L02) (Unknown Rate) LEW Company purchased a machine at a price of $100,000 by signing a note payable, which requires a single payment of $123,210 in 2 years. Assuming annual compounding of interest, what rate of interest is being paid on the loan?
E6-10 (L02) (Unknown Periods and Unknown Interest Rate) Consider the following independent situations.
(a) Mike Finley wishes to become a millionaire. His money market fund has a balance of $92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired $1,000,000?
(b) Assume that Sally Williams desires to accumulate $1 million in 15 years using her money market fund balance of $182,696. At what interest rate must Sally’s investment compound annually?
