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Accounting Questions

Using the time value of money concepts, offer guidance, include the following in your answer.
1-What TVM concept(s) is represented in the situation?
2-What is the value of the money represented by the situation?
3- How did you arrive at the value?

Question 1
I have \$10,000 cash to invest with a bank offering a 4% interest rate. I am not sure if I should invest the cash with the interest compounded quartely, semi-annually, or annually.
CALCULATE AND SHOW THE ENDING BALANCE ONLY AT THE END OF 5 YEARS using all 3 situations.

Question 2
A loan is offered to a customer with a 4% interest rate for \$40,000 five year note receivable. CALCULATE AND REFLECT THE BALANCE AT THE END OF 5 YEARS ONLY.

Question 3
I would like to retire in 15 years. My life expectancy upon retirement is 17 years and I will need \$60,000 a year to live comfortably. Use a discount rate of 6%. CALCULATE AND SHOW THE ENDING BALANCE ONLY.

Question 4
A balloon payment of \$150.000 is due in 5 years. I can either make payments into a fund at the beginning of the year or at the end of the year. The discount rate is 6%. CALCULATE BOTH SITUATIONS AND SHOW ENDING AMOUNTS AT THE END OF THE YEAR AND AT THE BEGINNING OF THE YEAR.

Question 5
I won the lottery for \$5,000,000. I can take the prize now or receive the payments over the next 20 years. CALCULATE BOTH SITUATIONS AND SHOW ENDING AMOUNTS ONLY.

Solution Preview

Question 1
I have \$10,000 cash to invest with a bank offering a 4% interest rate. I am not sure if I should invest the cash with the interest compounded quarterly, semi-annually, or annually.
CALCULATE AND SHOW THE ENDING BALANCE ONLY AT THE END OF 5 YEARS using all 3 situations.

The time value of money represented in the situation is to find the future value of the money invested for 5 years with the interest compounded quarterly, semi-annually, or annually.

Invest the cash with the interest compounded quarterly

FV = PV (1+R)N where PV is the present value
R is the interest rate
N is the period

FV = 10,000(1 + (0.04/4))5x4
= 10,000(1.2202)
= 12,202

Invest the cash with the interest compounded semi-annually

FV = 10,000 (1 + (0.04/2))5x2
FV = 10,000 (1.2190)
FV = 12,190

Invest the cash with the interest compounded annually

FV = 10,000 (1 + 0.04)5
FV = 10,000 (1.2167)
FV = 12,167

I determine the value by using the future value formula. We can see from the calculation that the investment with the interest compounded quarterly will give the highest future value for the initial investment of \$10,000. This is due to the compounding effect.

Question 2
A loan is offered to a customer with a 4% interest rate for \$40,000 five year note receivable. CALCULATE AND REFLECT THE BALANCE AT THE END OF 5 YEARS ONLY.

The time value of money represented in the situation is to find the future value of the money that the customer has to repay at the end of Year 5.

FV = PV (1+R)N where PV is the present value
R is the interest rate
N is the period

FV = 40,000 (1 + 0.04)5
FV = 40,000 (1.2167)
FV = 48,668

I determine the future value of five year note ...

Solution Summary

This solution is comprised of a detailed explanation to answer the accounting questions with calculations, formulas and written explanations in an attached Word document.

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