TEST BANK FINANCIAL ACCOUNTING INFORMATION FOR DECISIONS 7TH EDITION WILD TBAppB

Appendix B - Applying Present and Future Values

Appendix B
Applying Present and Future Values

These abbreviated tables can be used with the test questions that are tagged: Factor
Present Value of 1
Periods
3
4
5
6
7
8
9
10

3%
0.9151
0.8885
0.8626
0.8375
0.8131
0.7894
0.7664
0.7441

4%
0.8890
0.8548
0.8219

0.7903
0.7599
0.7307
0.7026
0.6756

5%
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139

6%
0.8396
0.7921
0.7473
0.7050
0.6651
0.6274
0.5919
0.5584

7%
0.8163
0.7629
0.7130

0.6663
0.6227
0.5820
0.5439
0.5083

8%
0.7938
0.7350
0.6806
0.6302
0.5835
0.5403
0.5002
0.4632

9%
0.7722
0.7084
0.6499
0.5963
0.5470
0.5019
0.4604
0.4224

10%
0.7513
0.6830
0.6209

0.5645
0.5132
0.4665
0.4241
0.3855

12%
0.7118
0.6355
0.5674
0.5066
0.4523
0.4039
0.3606
0.3220

4%
1.1249
1.1699
1.2167
1.2653
1.3159
1.3686
1.4233
1.4802

5%
1.1576
1.2155
1.2763

1.3401
1.4071
1.4775
1.5513
1.6289

6%
1.1910
1.2625
1.3382
1.4185
1.5036
1.5938
1.6895
1.7908

7%
1.2250
1.3108
1.4026
1.5007
1.6058
1.7182
1.8385
1.9672

8%
1.2597
1.3605
1.4693

1.5869
1.7138
1.8509
1.9990
2.1589

9%
1.2950
1.4116
1.5386
1.6771
1.8280
1.9926
2.1719
2.3674

10%
1.3310
1.4641
1.6105
1.7716
1.9487
2.1436
2.3579
2.5937

12%
1.4049
1.5735
1.7623

1.9738
2.2107
2.4760
2.7731
3.1058

6%
2.6730
3.4651
4.2124
4.9173
5.5824
6.2098
6.8017
7.3601

7%
2.6243
3.3872
4.1002
4.7665
5.3893
5.9713
6.5152
7.0236

8%
2.5771
3.3121
3.9927

4.6229
5.2064
5.7466
6.2469
6.7101

9%
2.5313
3.2397
3.8897
4.4859
5.0330
5.5348
5.9952
6.4177

10%
2.4869
3.1699
3.7908
4.3553
4.8684
5.3349
5.7950
6.1446

12%
2.4018
3.0373
3.6048

4.1114
4.5638
4.9676
5.3282
5.6502

Future Value of 1
Periods
3
4
5
6
7
8
9
10

3%
1.0927
1.1255
1.1593
1.1941
1.2299
1.2668
1.3048
1.3439

Present Value of an Annuity of 1
Periods
3

4
5
6
7
8
9
10

3%
2.8286
3.7171
4.5797
5.4172
6.2303
7.0197
7.7861
8.5302

4%
2.7751
3.6299
4.4518
5.2421
6.0021
6.7327
7.4353
8.1109

5%
2.7232

3.5460
4.3295
5.0757
5.7864
6.4632
7.1078
7.7217

AppB-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Future Value of an Annuity of 1
Periods
3
4
5
6
7
8
9
10

3%
3.0909
4.1836
5.3091

6.4684
7.6625
8.8923
10.159
11.464

4%
3.1216
4.2465
5.4163
6.6330
7.8983
9.2142
10.583
12.006

5%
3.1525
4.3101
5.5256
6.8019
8.1420
9.5491
11.027
12.578

6%
3.1836
4.3746
5.6371

6.9753
8.3938
9.8975
11.491
13.181

7%
3.2149
4.4399
5.7507
7.1533
8.6540
10.260
11.978
13.816

8%
3.2464
4.5061
5.8666
7.3359
8.9228
10.637
12.488
14.487

9%
3.2781
4.5731
5.9847

7.5233
9.2004
11.029
13.021
15.193

10%
3.3100
4.6410
6.1051
7.7156
9.4872
11.436
13.580
15.937

12%
3.3744
4.7793
6.3528
8.1152
10.089
12.300
14.776
17.549

True / False Questions
[Question]
1. Interest is the borrower’s payment to the owner of an asset for its use.
Answer: TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-C1
Topic: Interest

[Question]
2. From the perspective of a depositor, a savings account is a liability with interest.
Answer: FALSE
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-C1
Topic: Interest

[Question]
AppB-2
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.

Appendix B - Applying Present and Future Values

3. An interest rate is also called a discount rate.
Answer: TRUE
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-C1
Topic: Interest

[Question]
4. A company can use present and future value computations to estimate the interest component
of holding assets over time.
Answer: TRUE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-C1
Topic: Interest

[Question]
5. The number of periods in a present value calculation can only be expressed in years.
Answer: FALSE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Present Value

[Question]
6. The present value factor for determining the present value of a single sum to be received three
years from today at 10% interest compounded semiannually is 0.7462.
Answer: TRUE

AppB-3
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications

AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Present Value
Topic: Factor

[Question]

7. The present value of 1 formula is often useful when a borrowed asset must be repaid in full at
a later date and the borrower wants to know its worth at the future date.
Answer: FALSE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Present Value

[Question]

8. In a present value or future value table, the length of one time period may be one year, one
month, or any other length of time depending on the situation.
Answer: TRUE

Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-P1
Learning Objective: B-P2
Topic: Present Value
Topic: Future Value

[Question]

9. The present value of $2,000 to be received nine years from today at 8% interest compounded
annually is $1,000 (rounded to full dollar amount).
Answer: TRUE

AppB-4
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Feedback: $2,000 x 0.5002 = $1,000
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications

AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Present Value
Topic: Factor

[Question]
10. Sandra has a savings account that is now $50,000. She started with $28,225 and earned
interest at 10% compounded annually. It took five years to accumulate the $50,000.
Answer: FALSE
Feedback: $28,225/$50,000 = 0.5645. This is the present value of 1 factor, 10%, 6 periods.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Topic: PV
Topic: Factor

[Question]
11. Future value can be found if the interest rate (i), the number of periods (n), and the present
value (p) are known.
Answer: TRUE

Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P2
Topic: Future Value

[Question]
AppB-5
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

12. The number of periods in a future value calculation can only be expressed in years.
Answer: FALSE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P2

Topic: Future Value

[Question]

13. The future value of $100 compounded semiannually for three years at 12% equals $140.49.
Answer: FALSE
Feedback: $100 x 1.4185 = $141.85
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Future Value
Topic: Factor

[Question]
14. At an annual interest rate of 8% compounded annually, $5,300 will accumulate to a total of
$7,210.65 in five years.
Answer: FALSE
Feedback: $7,210.65/$5,300 = 1.3605. This is the future value of 1 factor for four periods, 8%.
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement

AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Factor
Topic: Future Value

[Question]

15. An annuity is a series of equal payments occurring at equal intervals.
AppB-6
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Answer: TRUE
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-P3
Topic: Annuity

[Question]
16. The present value of an annuity table can be used to determine the series of equal payments

that are required by a loan agreement.
Answer: TRUE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P3
Topic: Present Value

[Question]
17. An ordinary annuity refers to a series of equal payments made or received at the end of equal
intervals.
Answer: TRUE
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-P3
Topic: Ordinary Annuity

[Question]
18. The present value of $5,000 per year for three years at 12% compounded annually is

AppB-7
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

$12,009.
Answer: TRUE
Feedback: $5,000 x 2.4018 = $12,009
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

[Question]
19. With deposits of $5,000 at the end of each year, you will have accumulated $38,578 at the
end of the sixth year if the annual rate of interest is 10%.
Answer: TRUE
Feedback: $5,000 x 7.7156 = $38,578
Blooms Taxonomy: Apply
AACSB: Analytic

AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P4
Topic: Factor
Topic: Future Value
Topic: Annuity

[Question]
20. The future value of an ordinary annuity is the accumulated value of each annuity payment
with interest one period after the date of the final payment.
Answer: FALSE
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P4
Topic: Ordinary Annuity

Multiple Choice Questions

[Question]
AppB-8

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

21. Interest is:
A. Time.
B. A borrower's payment to the owner of an asset for its use.
C. The same as a savings account.
D. Always a liability.
E. Always an asset.
Answer: B
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-C1
Topic: Interest

[Question]
22. Which interest rate column would you use to determine the factor from a present value table
or a future value table for 8% compounded quarterly?
A. 12%
B. 6%
C. 3%

D. 2%
E. 1%
Answer: D
Feedback: 8% /4 = 2%
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Learning Objective: B-P2
Topic: Factor
Topic: Present Value
Topic: Future Value
Topic: Interest

[Question]
23. A company is considering investing in a project that is expected to return $350,000 four years
from now. How much is the company willing to pay for this investment if the company requires
AppB-9
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

a 12% return?

A. $ 55,606
B. $137,681
C. $222,425
D. $265,764
E. $350,000
Answer: C
Feedback: $350,000 x 0.6355 = $222,425
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Topic: Factor
Topic: Present Value

[Question]
24. Sam has a loan that requires a single payment of $4,000 at the end of three years. The loan's
interest rate is 6%, compounded semiannually. How much did Sam borrow?
A. $3,358.40
B. $4,000.00
C. $3,660.40
D. $4,776.40
E. $3,350.00
Answer: E
Feedback: $4,000 x 0.8375 = $3,350.00
Blooms Taxonomy: Apply

AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Factor
Topic: Present Value

[Question]
25. A company expects to invest $5,000 today at 12% annual interest and plans to receive
AppB-10
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

$15,529 at the end of the investment period. How many years will elapse before the company
accumulates the $15,529?
A. 0.322 years
B. 3.1058 years
C. 5 years
D. 8 years
E. 10 years
Answer: E
Feedback: $15,529/$5,000 = 3.1058
Future value of 1 factor of 3.1058 relates to 12%, 10 periods

Alternatively: $5,000/$15,529 = 0.3220
Present value of 1 factor of 0.3220 relates to 12%, 10 periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Learning Objective: B-P2
Topic: Factor
Topic: Present Value
Topic: Future Value

[Question]
26. Keisha has $3,500 now and plans on investing it in a fund that will pay her 12% interest
compounded quarterly. How much will Keisha have accumulated after two years?
A. $4,433.80
B. $4,340.00
C. $4,390.40
D. $3,920.00
E. $3,500.00
Answer: A
Feedback: $3,500 x 1.2668 = $4,433.80
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking

AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Factor
AppB-11
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values
Topic: Future Value

[Question]
27. How long will it take an investment of $25,000 at 6% compounded annually to accumulate to
a total of $35,462.50?
A) 4 years
B) 5 years
C) 6 years
D) 2 years
E) 10 years
Answer: C
Feedback: $35,462.50/$25,000 = 1.4185, the future value of 1 factor at 6% for six periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement

AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Factor

[Question]
28. What interest rate is required to accumulate $6,802.50 in four years from an investment of
$5,000?
A. 5%
B. 8%
C. 10%
D. 12%
E. 15%
Answer: B
Feedback: $6802.50/$5,000 = 1.3605, the future value of 1 factor at 8% for four periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Factor
Topic: Future Value

AppB-12
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.

Appendix B - Applying Present and Future Values

[Question]
29.Crowe Company has acquired a building with a loan that requires payments of $20,000 every
six months for five years. The annual interest rate on the loan is 12%. What is the present value
of the building?
A. $72,096
B. $113,004
C. $147,202
D. $86,590
E. $200,000
Answer: C
Feedback: $20,000 x 7.3601 = $147,202
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

[Question]
30. Jon Shear expects an investment of $25,000 to return $6,595 annually. His investment is

earning 10% per year. How many annual payments will he receive?
A. Five payments
B. Six payments
C. Four payments
D. Three payments
E. More than six payments
Answer: A
Feedback:
$25,000/$6,595 = 3.7908, the present value of an annuity of 1 factor at 10% for five periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
AppB-13
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values
Topic: Annuity

[Question]
31. A company is considering an investment that will return $20,000 at the end of each

semiannual period for four years. If the company requires an annual return of 10%, what is the
maximum amount it is willing to pay for this investment?
A. Not more than $63,398
B. Not more than $126,796
C. Not more than $80,000
D. Not more than $129,264
E. Not more than $160,000
Answer: D
Feedback: $20,000 x 6.4632 = $129,264
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Annuity
Topic: Present Value

[Question]
32.What amount can you borrow if you make six quarterly payments of $4,000 at a 12 % annual
rate of interest?
A. $24,838.00
B. $21,668.80
C. $31,049.00
D. $40,000.00
E. $44,800,00

Answer: B
Feedback: $4,000 x 5.4172 = $21,668.80
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Annuity
AppB-14
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values
Topic: Present Value

[Question]
33. An individual is planning to set-up an education fund for her children. She plans to invest
$10,000 annually at the end of each year. She expects to withdraw money from the fund at the
end of 10 years and expects to earn an annual return of 8%. What will be the total value of the
fund at the end of 10 years?
A. $ 46,320
B. $ 67,107
C. $100,000
D. $144,870

E. $215,890
Answer: D
Feedback: $10,000 x 14.487 = $144,870
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P4
Topic: Factor
Topic: Annuity
Topic: Future Value

[Question]
34.Chad is setting up a retirement fund, and he plans on depositing $5,000 per year in an
investment that will pay 7% annual interest. How long will it take him to reach his retirement
goal of $69,080?
A. 13.816 years
B. 0.072 years
C. 10 years
D. 20 years
E. 5 years
Answer: C
Feedback: $69,080/$5,000 = 13.816, the future value of an annuity of 1 factor at 7%, 10 periods
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications

AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
AppB-15
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values
Learning Objective: B-P4
Topic: Factor
Topic: Future Value
Topic: Annuity

Short Essay

[Question]
35.What is interest?
Answer:
Interest represents a borrower's payment to the owner of an asset in exchange for its use.
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy

Learning Objective: B-C1
Topic: Interest

[Question]
36. Explain the concept of the present value of a single amount.
Answer:
The present value of a single amount to be received at a future date is equal to the amount that
can be invested now at the specified interest rate to yield the future value.
Blooms Taxonomy: Understand
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P1
Topic: Present Value

[Question]
37. Explain the concept of the future value of a single amount.
Answer:
AppB-16
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

The future value of a single amount is equal to the amount that would accumulate at a future date

at a specified rate of interest.
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-P2
Topic: Future Value

[Question]
38. Explain the concept of the present value of an annuity.
Answer:
The present value of an annuity is the amount that can be invested now at the specified interest
rate to yield a series of equal periodic payments.
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P3
Topic: Present Value
Topic: Annuity

[Question]

39. Explain the concept of the future value of an annuity.
Answer:
The future value of an annuity to be invested at a specified rate of interest is the amount that
would accumulate at the date of the final periodic payment.
Blooms Taxonomy: Remember
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: B-P4
Topic: Future Value
Topic: Annuity

AppB-17
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Short Answer Questions

[Question]
40. A company needs to have $200,000 in four years, and will create a fund to ensure that the
$200,000 will be available. If they can earn a 7% return, how much must the company invest in
the fund today to equal the $200,000 at the end of four years?
Answer: $200,000 x 0.7629 = $152,580

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Topic: Present Value
Topic: Factor

[Question]
41. Annette has a loan that requires a $25,000 payment at the end of three years. The interest rate
on the loan is 5%, compounded annually. How much did Annette borrow today?
Answer: $25,000 x 0.8638 = $21,595
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Topic: Present Value
Topic: Factor

[Question]
42. Thompson Company has acquired a machine from a dealer which requires a payment of

$45,000 at the end of five years. This transaction includes interest at 8%, compounded
semiannually. What is the value of the machine today?
Answer: $45,000 x 0.6756 = $30,402
AppB-18
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Topic: Present Value
Topic: Factor

[Question]
43. A company is creating a fund by depositing $65,763 today. The fund will grow to $90,000
after eight years. What annual interest rate is the company earning on the fund?
Answer: $65,763/$90,000 = 0.7307
This is the present value of 1 factor for eight periods at 4%.
Alternatively: $90,000/$65,763 = 1.3686
This is the future value of 1 factor for 8 periods at 4%.
Blooms Taxonomy: Apply
AACSB: Analytic

AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Learning Objective: B-P2
Topic: Factor
Topic: Present Value
Topic: Future Value

[Question]
44. A company is setting aside $21,354 today and wishes to have $30,000 at the end of three
years for a down payment on a piece of property. What interest rate must the company earn?
Answer: $21,354/$30,000 = 0.7118
This is the present value of 1 factor for three periods at 12%. This implies the company must
earn 12%.
AppB-19
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

Alternatively: $30,000/$21,354 = 1.4049. This is the future value of 1 factor for three periods at
12%.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications

AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P1
Learning Objective: B-P2
Topic: Factor
Topic: Present Value
Topic: Future Value

AppB-20
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

[Question]
45. A company has $50,000 today to invest in a fund that will earn 7%. How much will the fund
contain at the end of eight years?
Answer: $50,000 x 1.7182 = $85,910
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium

Learning Objective: B-P2
Topic: Factor
Topic: Future Value

[Question]
46.Troy has $105,000 now. He has a loan of $175,000 that he must pay at the end of five years.
He can invest his $105,000 at 10% interest compounded semiannually. Will Troy have enough to
pay his loan at the end of the five years?
Answer: $105,000 x 1.6289 = $171,034.50
No, Troy will be $3,965.50 short of his goal of $175,000.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Topic: Factor
Topic: Future Value

AppB-21
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

[Question]

47. Madera Iron Sculpting is planning to save the money needed to replace one of its robotic
welders in five years by making a one-time deposit of $20,000 today and four yearly
contributions of $5,000 beginning at the end of year 1. The deposits will earn 10% interest. How
much money will Madera have accumulated at the end of five years to replace the welder?
Answer:
Future value of $20,000 deposit
Future value of $5,000 payments
Total accumulated

$20,000 x 1.6105 =
$5,000 x 4.6410 =

$32,210
23,205
$55,415

Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P2
Learning Objective: B-P4
Topic: Factor
Topic: Future Value
Topic: Annuity

[Question]
48. A company borrows money from the bank by promising to make six annual year-end
payments of $25,000 each. How much is the company able to borrow if the interest rate is 9%?
Answer: $25,000 x 4.4859 = $112,147.50
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

AppB-22
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

[Question]
49. A company borrows money from the bank by promising to make eight semiannual payments
of $9,000 each. How much is the company able to borrow if the interest rate is 10% compounded
annually?
Answer: $9,000 x 6.4632 = $58,168.80
Blooms Taxonomy: Apply

AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

[Question]
50. When you reach retirement age, you will have one fund of $100,000 from which you are
going to make annual withdrawals of $14,702. The fund will earn 6% per year. For how many
years will you be able to draw an even amount of $14,702?
Answer: Nine years.
Feedback: $100,000/$14,702 = 6.8017, the present value of 1 annuity factor at 6% for nine
periods.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Present Value

Topic: Annuity

[Question]
AppB-23
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

51. Big League Sports borrowed $883,212 and must make annual year-end payments of
$120,000 each. If the applicable interest rate is 6%, how many years will it take Big League
Sports to pay off the loan?
Answer: $883,212/$120,000 = 7.3601
This is the present value of an annuity factor at 6% for 10 periods. It will take 10 years to pay off
the loan.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

[Question]

52. Daley Co. lends $524,210 to Davis Corporation. The terms of the loan require that Davis
repay the loan with six semiannual period-end payments of $100,000 each. What semiannual
interest rate is Davis paying on the loan?
Answer: $524,210/$100,000 = 5.2421
This is the present value of an annuity factor for 6 periods at 4%.
Davis is paying a 4% semiannual rate, or 8% annual rate of interest.
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P3
Topic: Factor
Topic: Present Value
Topic: Annuity

[Question]
AppB-24
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.


Appendix B - Applying Present and Future Values

53. A company is beginning a savings plan. It will save $15,000 per year for the next 10 years.
How much will the company have accumulated after the tenth year-end deposit, assuming the
fund earns 10% interest?

Answer: $15,000 x 15.937 = $239,055
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P4
Topic: Factor
Topic: Future Value
Topic: Annuity

[Question]
54. You hope to retire in 10 years. Regrettably you are only just now beginning to save money
for this purpose. You expect to save $6,000 a year at an annual rate of 8%. How much will you
have accumulated when you retire?
Answer:
$6,000 x 14.487 = $86,922
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: B-P4
Topic: Factor

Topic: Future Value
Topic: Annuity

[Question]
55. A company is setting up a sinking fund to pay off $8,654,000 in bonds that are due in seven
years. The fund will earn 7% interest, and the company intends to put away a series of equal
year-end amounts for seven years. What amount must the company deposit annually?
Answer: $8,654,000/8.654 = $1,000,000 annually
Blooms Taxonomy: Apply
AACSB: Analytic
AACSB: Communications
AICPA BB: Critical Thinking
AICPA BB: Industry
AICPA FN: Measurement
AICPA FN: Reporting
AppB-25
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.