ACG 4101 Exam 2 Questions With Correct
Answers
Simple Interest Formula - CORRECT ANSWER✔✔-Initial Investment x
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Interest Rate x Period of time (x/12)
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Compound Interest - CORRECT ANSWER✔✔-includes interest on both
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principle and interest accumulated in previous periods. i.e.
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semiannually, quarterly, monthly | |
Cindy invested $1,000 in a savings account paying 10% interest
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compounded twice a year. What will be her investment balance at the
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end of the year? What is the effective annual interest rate? - CORRECT
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ANSWER✔✔-Divide 10% by 2 to make it 5% interest (annual rate | | | | | | | | | | |
divided by 2 periods of 6 months).
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Initial deposit after 6 months: 1,000 x 5% = 50
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End of year 1: 1,050 x 5% = 52.50
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Total balance after 1 year: 1,102.50
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Single Cash Flow Formulas
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- Future Value
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,- Present Value - CORRECT ANSWER✔✔-- Future Value = PV x FV $
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Factor |
- Present Value = FV x PV $ Factor
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- Future value entrails the addition of interest
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- Present value entails the removal of interest
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Cindy invested $1,000 in a savings account for 3 years paying 10%
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interest compounded annually. What can she receive at the end of year
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3? - CORRECT ANSWER✔✔-FV = PV x FV $ Factor
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FV = 1,000 x 1.331 (from table)
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FV = 1,331
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or...
1,000 x 1.10 [1.00+.10] then multiply it be 3 years
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1,000 x 1.10 x 1.10 x 1.10 = 1,331
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What is the present value of 1,331 received at the end of 3 years (10%
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annual compounding interest)? - CORRECT ANSWER✔✔-PV = FV x PV $
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Factor
PV = 1,331 x .75131
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PV = 1,000
| |
,The Stridewell Wholesale Shoe Company recently sold a large order of
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shoes to Harmon Sporting Goods. Terms of the sale require Harmon to
| | | | | | | | | | | |
sign a noninterest-bearing note of $60,500 w/payment due in 2 years.
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What is the price of the shoes? Assume the market interest rate is 10%.
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- CORRECT ANSWER✔✔-PV = FV x PV $ Factor
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PV = 60,500 x .8265
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PV = 50,000 | |
The Versa Tile Company purchased a delivery truck on February 1, 2016.
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The agreement required Versa Tile to pay the purchase price of $44,000
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on February 1, 2017. Assuming an 8% rate of interest, to calculate the
| | | | | | | | | | | | | |
price of the truck Versa Tile would multiply $44,000 by the:
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a. future value of an ordinary annuity of $1.
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b. present value of $1
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c. present value of an ordinary annuity of $1
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d. future value of $ - CORRECT ANSWER✔✔-b
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PV = FV x PV $ factor
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PV = 44,000 x PV $ Factor
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Turp and Tyne Distillery is considering investing in a two-year project.
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The company's required rate of return is 10%. The present value of $1
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for one period at 10% is .909 and .826 for two periods at 10%. The
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, project is expected to create cash flows, net of taxes, of $240,000 in the
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first year, and $300,000 in the second year. The distillery should invest in
| | | | | | | | | | | |
|the project if the project's cost is less than or equal to:
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a. 540,000
|
b. 490,860
|
c. 465,960
|
d. 446,040 - CORRECT ANSWER✔✔-c
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PV = 240,000 x .909
| | | |
PV = 218,160| |
PV = 300,000 x .826
| | | |
PV = 247,800| |
218,160 + 247,800 = 465,960 | | | |
Annuity
- Ordinary Annuity
| |
- Annuity Due - CORRECT ANSWER✔✔-A series of cash flows of same
| | | | | | | | | | | |
amount received or paid e/period.
| | | | |
- Ordinary A.: cash flow occurs at the end of e/period. The first cash flow
| | | | | | | | | | | | | |
is made one compounding period after the date on which agreements
| | | | | | | | | | | |
begins. The final cash flow takes place on the last day covered by the
| | | | | | | | | | | | | |
agreement.
Answers
Simple Interest Formula - CORRECT ANSWER✔✔-Initial Investment x
| | | | | | | |
Interest Rate x Period of time (x/12)
| | | | | |
Compound Interest - CORRECT ANSWER✔✔-includes interest on both
| | | | | | | |
principle and interest accumulated in previous periods. i.e.
| | | | | | | |
semiannually, quarterly, monthly | |
Cindy invested $1,000 in a savings account paying 10% interest
| | | | | | | | | |
compounded twice a year. What will be her investment balance at the
| | | | | | | | | | | |
end of the year? What is the effective annual interest rate? - CORRECT
| | | | | | | | | | | | |
ANSWER✔✔-Divide 10% by 2 to make it 5% interest (annual rate | | | | | | | | | | |
divided by 2 periods of 6 months).
| | | | | | |
Initial deposit after 6 months: 1,000 x 5% = 50
| | | | | | | | |
End of year 1: 1,050 x 5% = 52.50
| | | | | | | |
Total balance after 1 year: 1,102.50
| | | | |
Single Cash Flow Formulas
| | |
- Future Value
| |
,- Present Value - CORRECT ANSWER✔✔-- Future Value = PV x FV $
| | | | | | | | | | | | |
Factor |
- Present Value = FV x PV $ Factor
| | | | | | | |
- Future value entrails the addition of interest
| | | | | | |
- Present value entails the removal of interest
| | | | | | |
Cindy invested $1,000 in a savings account for 3 years paying 10%
| | | | | | | | | | | |
interest compounded annually. What can she receive at the end of year
| | | | | | | | | | | |
3? - CORRECT ANSWER✔✔-FV = PV x FV $ Factor
| | | | | | | | |
FV = 1,000 x 1.331 (from table)
| | | | | |
FV = 1,331
| |
or...
1,000 x 1.10 [1.00+.10] then multiply it be 3 years
| | | | | | | | |
1,000 x 1.10 x 1.10 x 1.10 = 1,331
| | | | | | | |
What is the present value of 1,331 received at the end of 3 years (10%
| | | | | | | | | | | | | | |
annual compounding interest)? - CORRECT ANSWER✔✔-PV = FV x PV $
| | | | | | | | | | |
Factor
PV = 1,331 x .75131
| | | |
PV = 1,000
| |
,The Stridewell Wholesale Shoe Company recently sold a large order of
| | | | | | | | | | |
shoes to Harmon Sporting Goods. Terms of the sale require Harmon to
| | | | | | | | | | | |
sign a noninterest-bearing note of $60,500 w/payment due in 2 years.
| | | | | | | | | | |
What is the price of the shoes? Assume the market interest rate is 10%.
| | | | | | | | | | | | |
- CORRECT ANSWER✔✔-PV = FV x PV $ Factor
| | | | | | | | |
PV = 60,500 x .8265
| | | |
PV = 50,000 | |
The Versa Tile Company purchased a delivery truck on February 1, 2016.
| | | | | | | | | | |
The agreement required Versa Tile to pay the purchase price of $44,000
| | | | | | | | | | | |
on February 1, 2017. Assuming an 8% rate of interest, to calculate the
| | | | | | | | | | | | | |
price of the truck Versa Tile would multiply $44,000 by the:
| | | | | | | | | |
a. future value of an ordinary annuity of $1.
| | | | | | | | |
b. present value of $1
| | | |
c. present value of an ordinary annuity of $1
| | | | | | | |
d. future value of $ - CORRECT ANSWER✔✔-b
| | | | | | |
PV = FV x PV $ factor
| | | | | |
PV = 44,000 x PV $ Factor
| | | | | |
Turp and Tyne Distillery is considering investing in a two-year project.
| | | | | | | | | | |
The company's required rate of return is 10%. The present value of $1
| | | | | | | | | | | | |
for one period at 10% is .909 and .826 for two periods at 10%. The
| | | | | | | | | | | | | | |
, project is expected to create cash flows, net of taxes, of $240,000 in the
| | | | | | | | | | | | | |
first year, and $300,000 in the second year. The distillery should invest in
| | | | | | | | | | | |
|the project if the project's cost is less than or equal to:
| | | | | | | | | | |
a. 540,000
|
b. 490,860
|
c. 465,960
|
d. 446,040 - CORRECT ANSWER✔✔-c
| | | |
PV = 240,000 x .909
| | | |
PV = 218,160| |
PV = 300,000 x .826
| | | |
PV = 247,800| |
218,160 + 247,800 = 465,960 | | | |
Annuity
- Ordinary Annuity
| |
- Annuity Due - CORRECT ANSWER✔✔-A series of cash flows of same
| | | | | | | | | | | |
amount received or paid e/period.
| | | | |
- Ordinary A.: cash flow occurs at the end of e/period. The first cash flow
| | | | | | | | | | | | | |
is made one compounding period after the date on which agreements
| | | | | | | | | | | |
begins. The final cash flow takes place on the last day covered by the
| | | | | | | | | | | | | |
agreement.
