Appendix G

Time Value of Money

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Read Appendix Review
Work Demonstration Problem
Answer True-False Statements
Answer Multiple-Choice Questions
Solve Exercises

APPENDIX REVIEW

1. A present value computation is based on the concept of the time value of money. The present value is based on three variables:
   1. the dollar amount to be received (future amount).
   2. the length of time until the amount is received (number of periods), and
   3. the interest rate (the discount rate).
2. The present value may be determined through tables that show the present value of 1 for N periods. Different percentages represent the periodic interest rates or discount rates, and the 5-digit numbers in the respective columns are the present value of 1 factors.
3. A higher discount rate produces a smaller present value. In addition, the further removed from the present the future amount is, the smaller the present value.
4. A series of periodic receipts or payments are called annuities. In computing the present value of an annuity, it is necessary to know the:
   1. discount rate.
   2. number of discount periods, and
   3. amount of the periodic receipts or payments.
5. Like the computation of present value of a single amount, tables may be used to compute the present value of an annuity. The tables show the present value of 1 to be received periodically for a given number of periods.
6. Discounting may be done on an annual basis or over shorter periods of time such as monthly, quarterly, or semiannually. When the time frame is less than one year, it is necessary to convert the annual interest rate to the applicable time frame.
7. The present value (or market price) of a long-term note or bond is a function of three variables:
   1. the payment amounts.
   2. the length of time until the amounts are paid, and
   3. the discount rate.
8. To compute the present value of a bond, both the interest payments and the principal amount must be discounted.

REVIEW QUESTIONS AND EXERCISES

TRUE—FALSE

Indicate whether each of the following is true (T) or false (F) in the space provided.

MULTIPLE CHOICE

1. Using Table 1, the present value factor for 2 periods at a discount rate of 8% is:
   1. .89000.
   2. .92593.
   3. .91743.
   4. .85734.
2. A higher discount rate produces:
   1. a smaller present value.
   2. a higher present value.
   3. the same present value.
   4. a greater length of time.
3. The present value of $5,000 due in 10 years using a discount rate of 12% is:
   1. $1,609.85.
   2. $1,927.70.
   3. $2,837.15.
   4. $3,219,70.
4. Which of the following is not necessary to know when computing the present value of an annuity?
   1. The discount rate.
   2. The amount of the periodic receipts or payments.
   3. The number of discount periods.
   4. The probability of receiving the amount due.
5. Alan Hirsch earns 15% on an investment that pays back $12,000 at the end of each of the next five years. Using Table 2, what is the amount Hirsch invested to earn the 15% rate of return?
   1. $201,129.60.
   2. $60,000.00.
   3. $40,225.92.
   4. $34,259.76.

EXERCISES

EX. G-1 a. If Tim Foran invests $20,900 now and wants to receive $100,000 at the end of 15 years, what annual rate of interest will Tim Foran earn on his investment?

b. Bova Corporation receives a $20,000, 8-year note bearing interest of 10% (paid annually) from a customer at a time when the discount rate is 8%. What is the present value of the note received by Bova?

SOLUTIONS TO REVIEW QUESTIONS AND EXERCISES

TRUE-FALSE

MULTIPLE CHOICE

EXERCISES

EX. G-1