Which of the Following Transactions Would Require the Use of the Present

question 14

Multiple Choice

Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of an asset acquired or liability assumed?

• A)A rental agreement is entered into with the initial payment due immediately.
• B)A rental agreement is entered into with the initial payment due one month from the signing of the agreement.
• C)A note payable is obtained from a bank requiring monthly payments for six years, beginning at the end of the current month.
• D)A machine is acquired by paying $20, 000 cash and agreeing to pay equal annual amounts of $10, 000 each at the end of the next three years.

---

Definitions:

Net Present Value

A method of evaluating investments by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Initial Investment

The initial amount of money spent to start a project, investment, or business, often including costs such as purchasing equipment, property, or technology.

Internal Rate of Return

The discount rate at which the net present value of all the cash flows from an investment or project equals zero, used as a gauge for its profitability.

Working Capital

The amount of current assets minus current liabilities, indicating the liquidity of a business.