26 amanda is ready to retire and as a retirement benefit she can choose to take 380 4352307

26) Amanda is ready to retire and as a retirement benefit, she can choose to take $380,000 now or $50,000 at the end of each year for a period of 10 years.  To compare the two options, she must calculate the present value of both alternatives.  She believes a discount rate of 5% would be the most appropriate rate to apply.  How much is the present value if she takes the cash as a lump sum right now?  Please refer to the following data, if needed:

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $380,000

B) $386,100

C) $321,000

D) $399,000

Answer:  A

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

27) Amanda is ready to retire and as a retirement benefit, she can choose to take $380,000 now or $50,000 at the end of each year for a period of 10 years.  To compare the two options, she must calculate the present value of both alternatives.  She believes a discount rate of 5% would be the most appropriate rate to apply.  How much is the present value if she takes the option of $50,000 a year for 10 years?  Please refer to the following data, if needed:

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $380,000

B) $386,100

C) $321,000

D) $399,000

Answer:  B

Explanation:  B) Calculations:  7.722 × $50,000 = $386,100

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

28) Simms Manufacturing is considering two alternative investment proposals with the following data:

Proposal X

Proposal Y

Investment

$620,000

$400,000

Useful life

8 years

8 years

Estimated annual net cash inflows for

8 years

$130,000

$80,000

Residual value

$60,000

$0

Depreciation method

Straight-line

Straight-line

Discount rate

14%

10%

What is the total present value of future cash inflows from Proposal Y?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $266,750

B) $426,800

C) $436,800

D) $536,800

Answer:  B

Explanation:  B) Calculations: $80,000 × 5.335 = $426,800

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

29) Simms Manufacturing is considering two alternative investment proposals with the following data:

Proposal X

Proposal Y

Investment

$620,000

$400,000

Useful life

8 years

8 years

Estimated annual net cash inflows for 8 years

$130,000

$80,000

Residual value

$0

$0

Depreciation method

Straight-line

Straight-line

Discount rate

9%

10%

What is the total present value of future cash inflows from Proposal X?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $878,340

B) $703,070

C) $614,230

D) $719,550

Answer:  D

Explanation:  D) Calculations: = 5.535 × $130,000 = $719,550

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

30) Simms Manufacturing is considering two alternative investment proposals with the following data:

Proposal X

Proposal Y

Investment

$620,000

$400,000

Useful life

8 years

8 years

Estimated annual net cash inflows for 8 years

$130,000

$80,000

Residual value

$60,000

$0

Depreciation method

Straight-line

Straight-line

Discount rate

14%

10%

What is the net present value of Proposal Y, taking into consideration the initial outlay and the subsequent

cash inflows?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $0

B) $26,800 positive

C) $136,800 positive

D) $133, 250 negative

Answer:  B

Explanation:  B) Calculations: (5.335 × $80,000) – $400,000 = $26,800

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

31) Simms Manufacturing is considering two alternative investment proposals with the following data:

Proposal X

Proposal Y

Investment

$620,000

$400,000

Useful life

8 years

8 years

Estimated annual net cash inflows for 8 years

$130,000

$80,000

Residual value

$0

$0

Depreciation method

Straight-line

Straight-line

Discount rate

9%

10%

What is the net present value of Proposal X, taking into consideration the initial outlay and the subsequent

cash inflows?

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

A) $23,070 positive

B) $99,550 positive

C) $13,070 negative

D) $4,130 negative

Answer:  B

Explanation:  B) Calculations:  (5.535 × $130,000) – $620,000 = $99,550

Diff: 2

LO:  21-3

EOC Ref:  S21-7

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

32) If you invest $3,000 today at 7% interest, what is the value of the investment at the end of 5 years?

Future Value of $1

4%

5%

6%

7%

8%

9%

1

1.040

1.050

1.060

1.070

1.080

1.090

2

1.082

1.103

1.124

1.145

1.166

1.188

3

1.125

1.158

1.191

1.225

1.260

1.295

4

1.170

1.216

1.262

1.311

1.360

1.412

5

1.217

1.276

1.338

1.403

1.469

1.539

6

1.265

1.340

1.419

1.501

1.587

1.677

7

1.316

1.407

1.504

1.606

1.714

1.828

8

1.369

1.477

1.594

1.718

1.851

1.993

9

1.423

1.551

1.689

1.838

1.999

2.172

10

1.480

1.629

1.791

1.967

2.159

2.367

A) $3,210

B) $4,367

C) $4,190

D) $4,209

Answer:  D

Explanation:  D) Calculations:  1.403 × $3,000 = $4,209

Diff: 1

LO:  21-3

EOC Ref:  S21-8

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

33) If you invest $1,000 at the end of each of the next 5 years and the investment earns 4% interest, what is the value of the investment at the end of 5 years?

Future Value of an Annuity of $1

4%

5%

6%

7%

8%

9%

1

1.000

1.000

1.000

1.000

1.000

1.000

2

2.040

2.050

2.060

2.070

2.080

2.090

3

3.122

3.153

3.184

3.215

3.246

3.278

4

4.246

4.310

4.375

4.440

4.506

4.573

5

5.416

5.526

5.637

5.751

5.867

5.985

6

6.633

6.802

6.975

7.153

7.336

7.523

7

7.898

8.142

8.394

8.654

8.923

9.200

8

9.214

9.549

9.897

10.26

10.64

11.03

9

10.58

11.03

11.49

11.98

12.49

13.02

10

12.01

12.58

13.18

13.82

14.49

15.19

A) $5,416

B) $4,310

C) $5,000

D) $5,200

Answer:  A

Explanation:  A) Calculations:  5.416 × $1,000 = $5,416

Diff: 1

LO:  21-3

EOC Ref:  S21-8

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

34) Jim wants to invest $5,000 a year for the next 25 years to prepare for his retirement.  If he wants to calculate the value of his investment at the end of the 25 year period, which of the following tables would be the best for him to use?

A) Present Value of $1

B) Present Value of an Annuity of $1

C) Future Value of $1

D) Future Value of an Annuity of $1

Answer:  D

Diff: 1

LO:  21-3

EOC Ref:  S21-8

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

35) Wilhelmina has just received an inheritance of $50,000, and she would like to put it into an investment portfolio for 20 years.  To calculate the value of the investment at the end of the 20 year period, which of the following tables would be the best for her to use?

A) Present Value of $1

B) Present Value of an Annuity of $1

C) Future Value of $1

D) Future Value of an Annuity of $1

Answer:  C

Diff: 1

LO:  21-3

EOC Ref:  S21-8

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement