## Managerial Accounting Creating Value in a Dynamic Business Environment 9Th Edition By – Hilton – Test Bank

Appendix II

Compound Interest and the Concept of Present Value

Multiple Choice Questions

1. The main idea behind the time value of money is that:

A. cash flows received in the distant future are less valuable than cash flows received in the near-term future.

B. cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3 plus $40,000 received in year 4.

C. cash flows received in different years are treated as equal in value.

D. cash payments made in the future have the same value as payments made today.

E. timing considerations of cash flows have little value in decision making.

2. The procedure used to compute the future value of a series of cash flows is known as:

A. compounding.

B. the annuity method.

C. discounting.

D. the future-cost approach.

E. indexing.

3. Norton Company has a 12% compound annual interest rate. If the firm invests $60,000 today, how much will have accumulated by the end of eight years?

A. $117,600.

B. $148,560.

C. $298,080.

D. $738,000.

E. Some other amount.

4. Lawson Company invests $60,000 today and has $148,560 by the end of eight years. What is the firm’s compound annual interest rate?

A. 10.00%.

B. 12.00%.

C. 18.45%.

D. 40.39%.

E. None of these.

5. The procedure used to compute the present value of a series of cash flows is known as:

A. compounding.

B. the annuity method.

C. discounting.

D. the present-cost approach.

E. indexing.

6. All other things being equal, which of the following would be the most attractive to an investor?

A. A cash inflow of $10,000 in five years.

B. A cash inflow of $2,000 each year for the next five years.

C. A cash inflow of $5,000 in year 1 and $5,000 in year 5.

D. A cash inflow of $10,000 today.

E. All of these would be equally attractive to an investor.

7. All other things being equal, which of the following would be most attractive to an investor?

A. A cash outflow of $60,000 in six years.

B. A cash outflow of $10,000 each year for the next six years.

C. A cash outflow of $30,000 in year 1 and $30,000 in year 6.

D. A cash outflow of $60,000 today.

E. All of these would be equally attractive to an investor.

8. A series of equal cash flows is called a(n):

A. ongoing cash flow.

B. payback.

C. accrual.

D. cash accumulation.

E. annuity.

9. The sum of the discount factors applicable to individual cash flows in a series of equal cash flows is called the:

A. single-sum, present-value factor.

B. total discount factor.

C. annuity discount factor.

D. compound discount factor.

E. internal rate discount factor.

10. Consider the following items of information:

I. The target recovery period.

II. The discount rate.

III. The timing (i.e., year) of a cash flow.

Which of the above items would be needed to calculate the present value of a cash flow?

A. I only.

B. II only.

C. I and II.

D. II and III.

E. I, II, and III.

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