Question

Answer the following questions 1-10:

1# Which of the following transactions would best use the present value of an annuity due of 1 table?

a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.

b. Edmiston Co. rents a warehouse for 7 years with annual rental payments of $120,000 to be made at the end of each year.

c. Durant, Inc. borrows $20,000 and has agreed to pay back the principal plus interest in three years.

d. Babbitt, Inc. wants to deposit a lump sum to accumulate $50,000 for the construction of a new parking lot in 4 years.

2# If the interest rate is 10%, the factor for the future value of an annuity due of 1 for n = 5, i = 10% is equal to the factor for the future value of an ordinary annuity of 1 for n = 5, i = 10%

a. plus 1.10.

b. minus 1.10.

c. multiplied by 1.10.

d. divided by 1.10.

3# Sue Gray wants to invest a certain sum of money at the end of each year for five years. The investment will earn 6% compounded annually. At the end of five years, she will need a total of $40,000 accumulated. How should she compute her required annual invest-ment?

a. $40,000 times the future value of a 5-year, 6% ordinary annuity of 1.

b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.

c. $40,000 times the present value of a 5-year, 6% ordinary annuity of 1.

d. $40,000 divided by the present value of a 5-year, 6% ordinary annuity of 1.

4# If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then

a. the present value of the annuity due is less than the present value of the ordinary annuity.

b. the present value of the annuity due is greater than the present value of the ordinary annuity.

c. the future value of the annuity due is equal to the future value of the ordinary annuity.

d. the future value of the annuity due is less than the future value of the ordinary annuity.

5# Charlie Corp. is purchasing new equipment with a cash cost of $300,000 for an assembly line. The manufacturer has offered to accept $68,900 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

a. $68,900.

b. $300,000.

c. $413,400.

d. $113,400.

6# Ethan has $240,000 to invest today at an annual interest rate of 4%. Approximately how many years will it take before the investment grows to $486,000?

a. 18 years.

b. 20 years.

c. 16 years.

d. 11 years.

7# Bates company has entered into a lease equipment for office equipment that could be purchased now for $252,336. Bathes, however, has chosen to lease the equipment for $70,000 per year, payable at the end of the next 5 years. The interest rate applicable to the lease payment is _______

Questions 8-10 are based on the following information: Everhart Company issues $2,000,000, 6%, 5-year bonds dated January 1, 2018 on January 1, 2018. The bonds pay interest semiannually on June 30 and December 31. The market rate of interest was 4%. Use the tables in your book to calculate the amounts below.

8# The bond will be issued at:

a. face value

b. a discount

c. a premium

d. par value

9#. The issue price of the bond was________

10# The amount of the first interest payment will be ______

Answer 1

1.Annuity due is the series of equal amounts paid/received at the beginning of each period

a. Fernetti, Inc. rents a truck for 5 years with annual rental payments of $20,000 to be made at the beginning of each year.

2.The answer is c. multiplied by 1.10.

Since interest of one period is earned extra on an annuity due

3. b. $40,000 divided by the future value of a 5-year, 6% ordinary annuity of 1.

Since 40,000 is the future value, dividing it by future value factor will give the annual amount

4. a. the present value of the annuity due is less than the present value of the ordinary annuity.

Since interest is earned more on annuity due

5.Interest = 68,900*6-300,000

= $113,400

i.e. d

6.Let it takes x years

240,000(1.04)^x = 486,000

X = 18 years

i.e. a

7.Let the interest rate be x

70,000*PVAF(x%, 5 years) = 252,336

PVAF(x%, 5 years) = 3.6048

X = 12 %(from present value annuity factor table)

Hence, the interest rate applicable 12%

8.Since the coupon rate is more than the required rate, the bond will be issued at premium