6 the only difference between present value and future value is the amount of intere 4306826

6 the only difference between present value and future value is the amount of intere 4306826

6) The only difference between present value and future value is the amount of interest that is earned in the intervening time span.

7) Paramount Company is considering purchasing new equipment costing $700,000. The management has estimated that the equipment will generate cash flows as follows:

Year 1

$200,000

     2

200,000

     3

250,000

     4

250,000

     5

150,000

Present value of $1:

6%

7%

8%

9%

10%

1

0.943

0.935

0.926

0.917

0.909

2

0.89

0.873

0.857

0.842

0.826

3

0.84

0.816

0.794

0.772

0.751

4

0.792

0.763

0.735

0.708

0.683

5

0.747

0.713

0.681

0.65

0.621

The company's required rate of return is 8%. Using the factors in the table, calculate the present value of the cash inflows. (Round all calculations to the nearest whole dollar)

A) $890,000

B) $750,000

C) $850,000

D) $841,000

8) Paramount Company is considering purchasing new equipment costing $700,000. Company's management has estimated that the equipment will generate cash flows as follows:

Year 1

$200,000

     2

200,000

     3

250,000

     4

250,000

     5

150,000

Present value of $1:

6%

7%

8%

9%

10%

1

0.943

0.935

0.926

0.917

0.909

2

0.89

0.873

0.857

0.842

0.826

3

0.84

0.816

0.794

0.772

0.751

4

0.792

0.763

0.735

0.708

0.683

5

0.747

0.713

0.681

0.65

0.621

The company's required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows.

A) $850,000

B) $819,300

C) $820,500

D) $852,000

9) Paramount Company is considering purchasing new equipment costing $700,000. Company's management has estimated that the equipment will generate cash flows as follows:

Year 1

$200,000

     2

200,000

     3

250,000

     4

250,000

     5

150,000

The company's required rate of return is 10%. Using the factors in the table below, calculate the present value of the cash inflows. Present value of $1:

6%

7%

8%

9%

10%

1

0.943

0.935

0.926

0.917

0.909

2

0.89

0.873

0.857

0.842

0.826

3

0.84

0.816

0.794

0.772

0.751

4

0.792

0.763

0.735

0.708

0.683

5

0.747

0.713

0.681

0.65

0.621

A) $765,000

B) $768,921

C) $798,650

D) $780,000

10) Which of the following describes the term time value of money?

A) Money can be used only at certain times and only for certain purposes.

B) Money loses its purchasing power over time through inflation.

C) Wasted time can result in wasted money.

D) Value of a dollar received today will be higher than that received after some time.

11) Which of the following most accurately describes the term annuity?

A) an investment which produces increasing cash flows overtime

B) an installment loan with amortizing principal payments

C) a stream of equal installments of cash flows made at equal time intervals

D) a term life insurance policy

12) Lara is going to receive $10,000 a year at the end of each of the next five years from her insurer to meet her education cost. Using a discount rate of 14%, the present value of the receipts can be stated as:

A) PV = $10,000 (Annuity FV factor, i = 14%, n = 5).

B) PV = $10,000 (PV factor, i = 14%, n = 5).

C) PV = $10,000 (Annuity PV factor, i = 14%, n = 5).

D) PV = $10,000 (FV factor, i = 14%, n = 5).

13) If $10,000 is invested annually in an account with 7% interest compounded yearly, what will the balance of the account be after six years? Refer to the following Future Value table:

Future value of annuity of $1:

5%

6%

7%

8%

1

1

1

1

1

2

2.05

2.06

2.07

2.08

3

3.153

3.184

3.215

3.246

4

4.31

4.375

4.44

4.506

5

5.526

5.637

5.751

5.867

6

6.802

6.975

7.153

7.336

7

8.142

8.394

8.654

8.923

A) $79,050

B) $71,530

C) $18,020

D) $83,290

14) If $15,000 is invested annually in an account with 9% interest compounding yearly, what will the balance of the account be after five years? Refer to the following Future Value table:

Future value of annuity of $1:

7%

8%

9%

1

0.935

0.926

0.917

2

1.808

1.783

1.759

3

2.624

2.577

2.531

4

3.387

3.312

3.24

5

4.1

3.993

3.89

6

4.767

4.623

4.486

7

5.389

5.206

5.033

A) $26,180

B) $26,211

C) $58,350

D) $25,125

15) John wins the lottery and has the following three payout options for after-tax prize money:

1. $150,000 per year at the end of each of the next six years

2. $300,000 (lump sum) now

3. $500,000 (lump sum) six years from now

The required rate of return is 9%. What is the present value if he selects the first option? Round to nearest whole dollar.

Present value of annuity of $1:

8%

9%

10%

1

0.926

0.917

0.909

2

1.783

1.759

1.736

3

2.577

2.531

2.487

4

3.312

3.24

3.17

5

3.993

3.89

3.791

6

4.623

4.486

4.355

7

5.206

5.033

4.868

Present value of $1:

8%

9%

10%

1

0.926

0.917

0.909

2

0.857

0.842

0.826

3

0.794

0.772

0.751

4

0.735

0.708

0.683

5

0.681

0.65

0.621

6

0.63

0.596

0.564

7

0.583

0.547

0.513

A) $750,000

B) $672,900

C) $450,000

D) $450,050

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