ACC 371 Week 4 Quiz 6

ACC 371 Week 4 Quiz 6 | Mercer University

Question 1

Alberta Corp. is looking to invest $8,000 in an account with an annual rate of 5.6%, compounded annually over 6 years.  However, the CFO wants to consider other investment options. 

Which of the following investments will return the most for Alberta?  

Investing $8,000 in an account with an annual rate of 5.6% compounded annually over 6 years.  

The same as A but with an annual interest rate of 6%.  

The same as A but compounded semiannually.  

The same as A but investing $8,200 initially.  

The same as A but investing $8,100 and compounding quarterly

                RATE      NPER     PMT       PV          FV

A             0.056     6             0              -8000     $11,093.63

B             0.060     6             0              -8000     $11,348.15

C             0.028     12           0              -8000     $11,143.13

D             0.056     6             0              -8200     $11,370.97

E              0.014     24           0              -8100     $11,308.26

                RATE      NPER     PMT       PV          FV

A             0.056     6             0              -8000     $11,093.63

B             0.060     6             0              -8000     $11,348.15

C             0.028     12           0              -8000     $11,143.13

D             0.056     6             0              -8200     $11,370.97

E              0.014     24           0              -8100     $11,308.26

Question 2

On January 1, 2020, Flannagan Fencing Corp. establishes a debt retirement fund to pay off a $500,000 debt due in 8 years.  If the fund earns interest at 6% and payments will be made monthly, starting January 1, 2020, what amount must be deposited each month?  Round your answer to the nearest dollar.  

$  6,571  

$  4,050  

$28,408 

$  6,538 

$  7,677

Question 3

Simple Leasing Co. leases equipment to Sullivan Dynamics over an 8-year period with payments due annually starting immediately on January 1, 2020.  The equipment has a useful life of 8 years and no salvage value.  Simple Leasing Co. builds a 13% rate of return into the lease.  The annual lease payment on the lease is $13,277.80. 

What is the fair value of the equipment leased and what is the amount of interest revenue Simple Leasing will earn over the lease term?  Round both amounts to the nearest dollar. 

Fair Value Equipment     Interest Revenue  

$106,222              $85,186  

$  72,000              $  9,360  

$106.222              $13,809  

$  72,000              $34,222 

Question 4

Bond interest expense for a year for a bond paying interest annually is equal to 

The market rate of interest times the face value of the bond.  

The stated rate of interest times the face value of the bond.  

The market rate of interest times the carrying value of the bond at the end of the annual interest period.  

The stated rate of interest times the carrying value of the bond at the beginning of the annual interest period.  

None of these Answers are correct.

B and D are incorrect because the stated rate is used only to calculate the cash interest payment required for a bond.

A and C are incorrect;  bond interest for a year on a bond paying interest annually is equal to the market rate of interest times the carrying value of a bond at the beginning of the annual interest period.

Question 5

Nikolai wants to know how much to invest today (rounded to the nearest dollar) in an account earning 6.4% interest compounded quarterly to have $80,000 at the end of 8 years.  Which value below is correct?

$48,703  

$10,989  

$48,138  

$70,460  

Some other value.

Question 6

FrackStar Corp. is estimating remediation costs related to cleaning up a fracking site in 20 years when the site is estimated to be closed.  Due to uncertainties related to the degree of possible site contamination, management estimates the following remediation costs and related probability of occurrence: 

Remediation Costs          Probability

$1,000,000           15%

850,000                 50%

700,000                 30%

500,000                 5%              

Using the expected cash flow approach and assuming a risk-free rate of 4%, what value should FrackStar record for the remediation costs (to the nearest dollar) in the current year financial statements?

  Expected Cash Flow        Recorded Value  

$762,500              $  347,995  

810,000                 1,774,810

762,500                 1,670,731  

810,000                    369,673

Question 7

Javy plans to make the following cash outflows for an investment returning 6.0% (annual compounding) per year: $14,000 today, $8,000 in a year from now, and $2,000 two years from now.  He wants to know how much he will have at the end of the third year.

Which of the Answers below is correct?

Add up the following: ($14,000 x 6.0%) + ($8,000 x 6.0%) + ($2,000 x 6.0%).  

Apply the Excel function to calculate the future value of an annuity due, with payment equaling the average of the three payments (($14,000 + $8,000 + $2,000)/3 = $8,000),  

Apply the Excel function to calculate the future value of a single sum to each payment as it were a single sum.  Then add the future value of $14,000 in three years, the future value of $8,000 in two years, and the future value of $2,000 in one year together.  

Apply the Excel function to calculate the future value of a single sum with the present value equaling the average of the three payments ($8,000).

Per the text, “In cases where payments are … unequal, each cash amount is considered a lump-sum amount and not an annuity.”  In this case, C outlines the correct calculation:

Question 8

Assume that, on January 1, 2020, a $100,000, 8%, 5 year bond with semiannual cash interest payments due each July 1 and December 31 is issued.  The market rate for bonds with a similar risk profile is 10%. 

What is the bond interest expense at the end of the 6th six month interest payment period where the starting carrying value of this bond was $95,671 and the ending carrying value of the bond was $96,454?  Round to the nearest dollar.  

$ 5,000  

$ 3,827  

$ 4,823  

$    784  

$ 4,784

Question 9

Which of the following investments will return the most to an investor?

$12,000 invested at an annual rate of 5%, compounded semiannually for 8 years.  

$12,000 invested at an annual rate of 6%, compounded annually for 6 years.  

$10,000 invested at an annual rate of 6%, compounded quarterly for 8 years.  

$8,000 invested at an annual rate of 6%, compounded monthly for 9 years.  

$8,000 invested at an annual rate of 8%, compounded annually for 10 years. 

Question 10

Sally invested $5,000 in a three-year 3% CD with interest compounded monthly.  What are the values for the following? 

 Interest Rate per Compounding Period                   Total Number of Compounding Periods  

3%                          12

0.25%                    36

1%                          12 

0.25%                    12  

1%                          36