The following questions are used in the Kaplan CPA Review Course to study the time value of money while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. An investment product promises to pay $25,458 at the end of nine years. If an investor feels this investment should produce a rate of return of 14 percent, compounded annually, what's the most the investor should be willing to pay for the investment?
a. $6,866
b. $7,828
c. $8,926
d. $9,426
2. On January 1, 2011, Ott Company sold goods to Fox Company. Fox signed a noninterest-bearing note requiring payment of $60,000 annually for seven years. The first payment was made on January 1, 2011. The prevailing rate of interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:
Ott should record sales revenue in January 2011 of
a. $214,200
b. $261,600
c. $292,600
d. $321,600
3. An annuity will pay eight annual payments of $100, with the first payment to be received one year from now. If the interest rate is 12 percent per year, what is the present value of this annuity? Use the appropriate table located at the end of the textbook to solve this problem.
a. $497
b. $556
c. $801
d. $897
4. An annuity will pay four annual payments of $100, with the first payment to be received three years from now. If the interest rate is 12 percent per year, what is the present value of this annuity? Use the appropriate table located at the end of the textbook to solve this problem.
a. $181
b. $242
c. $304
d. $400
5. Justin Banks just won the lottery and is trying to decide between the annual cash flow payment option of $100,000 per year for 15 years beginning today, or the lump-sum option. Justin can earn 8 percent investing his money. At what lump-sum payment amount would he be indifferent between the two alternatives? Use the appropriate table located at the end of the textbook to solve this problem.
a. $824,424
b. $855,948
c. $890,378
d. $924,424
6. An investor purchases a 10-year, $1,000 par value bond that pays annual interest of $100. If the market rate of interest is 12 percent, what is the current market value of the bond?
a. $ 887
b. $ 950
c. $1,000
d. $1,100
7. You borrow $15,000 to buy a car. The loan is to be paid off in monthly installments over five years at 12 percent interest annually. The first payment is due one month from today. If the present value of an ordinary annuity of $1 for 5 years @ 12% with monthly compounding is $44.955, what is the amount of each monthly payment?
a. $334
b. $456
c. $546
d. $680