Spencer Corporation will invest $25,000 every December 31st for the next six yea

Question

Spencer Corporation will invest $25,000 every December 31st for the next six years (2017 – 2022). If Spencer will earn 12% on the investment, what amount will be in the investment fund on December 31, 2022? $102,785. $115,120. $202,880. $227,225 The time value of money refers to the fact that a dollar received today is worth less than a dollar promised at some time in the future. True False Charlie Corp. is purchasing new equipment with a cash cost of $300,000 for an assembly line. The manufacturer has offered to accept $68,900 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

Explanation / Answer

Answer 1.

Annual Deposit = $25,000
Period = 6 years
Interest Rate = 12%

Accumulated Sum = $25,000*1.12^5 + $25,000*1.12^4 + $25,000*1.12^3 + $25,000*1.12^2 + $25,000*1.12 + $25,000
Accumulated Sum = $25,000 * (1.12^6 - 1) / 0.12
Accumulated Sum = $25,000 * 8.1152
Accumulated Sum = $202,880

Balance in investment fund on December 31, 2022 is $202,880

Answer 2.

True.
Time value of money means that value of money increases with time.
So, a dollar received today will worth more than a dollar at some time in future.

Answer 3.

Cost of equipment = $300,000
Annual Payment = $68,900
Period = 6 years

Let annual interest rate be i%

$300,000 = $68,900 * PVIFA(i%, 6)

Using financial calculator:
N = 6
PV = -300000
PMT = 68900
FV = 0

I = 10.0%

So, Charlie Corp. will pay 10.0% interest over the term of loan

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