The Solution to This Problem Requires Time Value of Money

question 127

Multiple Choice

The solution to this problem requires time value of money calculations.Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. If a company wishes to accumulate $500,000 in 20 years at 5% by making equal yearly deposits into an account, calculation of the deposits is an application of the

• A) future value of a single amount
• B) present value of a single amount
• C) future value of an annuity
• D) present value of an annuity

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Definitions:

Cash Break-even

The point at which a business generates enough cash flow to cover its operating expenses and capital costs.

Variable Costs

Expenses that vary directly with the level of business activity.

Fixed Costs

Costs that do not vary with the level of output or sales, such as rent, salaries, and insurance premiums.

Internal Rate of Return

The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used to evaluate the profitability of potential investments.