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Exam 6: Time Value of Money Concepts

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Question 41

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Monetary assets include only cash and cash equivalents.

A) True
B) False

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Question 42

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Jackpot Mining is obligated to the State of California to restore leased land to its original condition after its mining activities are completed in six years. The cash flow possibilities and probabilities for the restoration costs in six years are as follows: $\begin{array}{cc}\text { Cash Outflow } & \text { Probability } \\\hline \$ 5 \text { million } & 10 \% \\10 \text { million } & 30 \% \\12 \text { million } & 40 \% \\15 \text { million } & 20 \%\end{array}$ The company's risk-free interest rate is 4%. Required: Calculate the liability that Jackpot must record at the beginning of the project for the restoration costs.

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The expected cash flow is
$ 5,000,000 × ...

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Question 43

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Under the NBA deferred compensation plan, payments made at the end of each year accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree to select the amount of the annual payment to be received, and option 2 allows the retiree to specify over how many years payments are to be received. Assume Hardaway has had $6,000 deposited at the end of each year for 30 years, and that the long-term interest rate has been 8%. Required: a. How much has accumulated in Hardaway's deferred compensation account? b. How much will Hardaway be able to withdraw at the beginning of each year if he elects to receive payments for 15 years? c. How many years will Hardaway be able to receive payments if he chooses to receive $65,000 per year at the beginning of each year?

Present and future value tables of $1 at 11% are presented below. -On October 1, 2018, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2019. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

Present and future value tables of $1 at 3% are presented below: -Carol wants to invest money in a 6% CD account that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?

A series of equal periodic payments that starts more than one period after the agreement is called:

Most, but not all, liabilities are monetary liabilities.

Mary Alice just won the lottery and is trying to decide between the options of receiving the annual cash flow payment option of $250,000 per year for 25 years beginning today, or receiving one lump-sum amount today. Mary Alice can earn 6% investing this money. At what lump-sum payment amount would she be indifferent between the two alternatives? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, each to be paid one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

Determine the price of a $500,000 bond issue under each of the following independent assumptions:

Below are excerpts from time value of money tables for the 8% rate. -Column 1 is an interest table for the:

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Present and future value tables of $1 at 3% are presented below: -Sondra deposits $2,000 in an IRA account on April 15, 2018. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2028?

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following: Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date. Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following: -The total cash interest payments in 2018 for these notes.

Present and future value tables of $1 at 3% are presented below: -Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?

Present and future value tables of $1 at 11% are presented below. -Spielberg Inc. signed a $200,000 noninterest-bearing note due in five years from a production company eager to do business. Comparable borrowings have carried an 11% interest rate. What is the value of this debt at its inception?

Provide two examples of the use of present value techniques in accounting.

Present and future value tables of $1 at 3% are presented below: -Rosie's Florist borrows $300,000 to be paid off in six years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

The note about debt included in the financial statements of Healdsburg Company for the year ended December 31, 2017 disclosed the following: Debt. The following table summarizes the long-term debt of the Company at December 31, 2017. All of the notes were originally issued at their face (maturity) value and have been gradually repaid over time so that these amounts are the remaining balances at this date. Required: Assuming that the notes pay interest annually and mature on December 31 of the respective years, compute the following: -Suppose that Healdsburg renegotiates the 8% notes on December 31, 2023, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2024, rather than pay the annual interest payments and the $225 million in a single amount at maturity. What would the annual payments be?

On January 1, 2018, Rare Bird Ltd. purchased 12% bonds dated January 1, 2018, with a face amount of $20 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: Determine the price of the bonds at January 1, 2018.