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Exam 6: Time Value of Money Concepts

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Question 1

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Santa Cruz Oil is obligated to the State of Nevada to restore leased land to its original condition after its oil drilling activities are over in four years. The cash flow possibilities are probabilities for the restoration costs in four years are as follows: The company's credit-adjusted risk-free interest rate is 6%. Required: Calculate the liability that Santa Cruz must record at the beginning of the project for the restoration costs.

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The expected cash fl...

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Question 2

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Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?

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Jose wants to cash in his winning lottery ticket. He can either receive five $5,000 annual payments starting today, or he can receive a lump-sum payment now based on a 3% annual interest rate. What would be the lump-sum payment?

Explain how you would compute the imputed interest on cash borrowed at 0% interest when the market rate of interest is 8%.

With an ordinary annuity, a payment is made or received on the date the agreement begins.

Briefly explain how you would arrive at the monthly payment for a 48-month loan where the first payment is due one month from the loan date. In your explanation, include the use of present and future value tables.

Prepare a time diagram for the future value of an ordinary annuity with three payments of $300. Be sure to indicate the periods in which interest is added.

Most, but not all, liabilities are monetary liabilities.

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

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

In the future value of an ordinary annuity, the last cash payment will not earn any interest.

When interest is compounded, the stated rate of interest exceeds the effective rate of interest.

An annuity consists of level principal payments plus interest on the unpaid balance.

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is 5%, what is the current market value of the bond?

Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold at the end of 10 years for $10,000. Interest is at 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine if Baird should purchase the machine.

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

Listed below are columns of time value of money tables for the 9% rate, followed by labels for five of the columns. Match the columns with their appropriate labels by placing the letter designating the column in the space provided by the label.

LeAnn wishes to know how much she should set invest now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today?

On September 30, 2013, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2014. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability Required: Determine the interest rate implicit in the lease agreement.