0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)

149 Ansichten41 Seitensolutions manual chapter 6

Aug 13, 2015

© © All Rights Reserved

PDF, TXT oder online auf Scribd lesen

solutions manual chapter 6

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)

149 Ansichten41 Seitensolutions manual chapter 6

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

Sie sind auf Seite 1von 41

documentation of outcomes assessment. Although schools, departments, and faculty may approach

assessment and its documentation differently, one approach is to provide specific questions on

exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each

question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning

skills:

Questions

AACSB Tags

Exercises (cont.)

AACSB Tags

61

62

63

64

65

66

67

68

69

610

611

612

613

614

615

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Reflective thinking

Analytic

Analytic

Reflective thinking

Reflective thinking

Analytic

Reflective thinking, Communications

69

610

611

612

613

614

615

616

617

618

619

620

621

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Reflective thinking

Brief Exercises

61

62

63

64

65

66

67

68

69

610

611

612

613

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Exercises

61

62

63

64

65

66

67

68

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

CPA/CMA

1

2

3

4

5

6

7

1

2

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Reflective thinking

Problems

61

62

63

64

65

66

67

68

69

610

611

612

613

614

615

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

Analytic

The McGraw-Hill Companies, Inc., 2013

61

Question 61

Interest is the amount of money paid or received in excess of the amount borrowed or lent.

Question 6-2

Compound interest includes interest not only on the original invested amount but also on the

accumulated interest from previous periods.

Question 63

If interest is compounded more frequently than once a year, the effective rate or yield will be

higher than the annual stated rate.

Question 64

The three items of information necessary to compute the future value of a single amount are

the original invested amount, the interest rate (i), and the number of compounding periods (n).

Question 65

The present value of a single amount is the amount of money today that is equivalent to a given

amount to be received or paid in the future.

Question 66

Monetary assets and monetary liabilities represent cash or fixed claims/commitments to

receive/pay cash in the future and are valued at the present value of these fixed cash flows. All other

assets and liabilities are nonmonetary.

Question 67

An annuity is a series of equal-sized cash flows occurring over equal intervals of time.

Question 68

An ordinary annuity exists when the cash flows occur at the end of each period. In an annuity

due the cash flows occur at the beginning of each period.

Question 69

Table 2 lists the present value of $1 factors for various time periods and interest rates. The

factors in Table 4 are simply the summation of the individual PV of $1 factors from Table 2.

62

Question 610

Present

Value

?

0

Year 1

Year 2

Year 3

Year 4

___________________________________________

$200

$200

$200

n = 4, i = 10%

$200

Question 611

Present

Value

?

0

Year 1

Year 2

Year 3

Year 4

___________________________________________

$200

$200

$200

$200

n = 4, i = 10%

Question 612

A deferred annuity exists when the first cash flow occurs more than one period after the date

the agreement begins.

Question 613

The formula for computing present value of an ordinary annuity incorporating the ordinary

annuity factors from Table 4 is:

PVA = Annuity amount x Ordinary annuity factor

Solving for the annuity amount,

PVA

Annuity amount = Ordinary annuity factor

The annuity factor can be obtained from Table 4 at the intersection of the 8% column and 5

period row.

Question 614

Annuity amount =

Annuity amount =

$500

3.99271

$125.23

63

Question 615

Companies frequently acquire the use of assets by leasing rather than purchasing them. Leases

usually require the payment of fixed amounts at regular intervals over the life of the lease. Certain

leases are treated in a manner similar to an installment sale by the lessor and an installment purchase

by the lessee. In other words, the lessor records a receivable and the lessee records a liability for the

several installment payments. For the lessee, this requires that the leased asset and corresponding

lease liability be valued at the present value of the lease payments.

64

BRIEF EXERCISES

Brief Exercise 61

Fran should choose the second investment opportunity. More rapid compounding

has the effect of increasing the actual rate, which is called the effective rate, at which

money grows per year. For the second opportunity, there are four, three-month

periods paying interest at 2% (one-quarter of the annual rate). $10,000 invested will

grow to $10,824 ($10,000 x 1.0824*). The effective annual interest rate, often referred

to as the annual yield, is 8.24% ($824 $10,000), compared to just 8% for the first

opportunity.

* Future value of $1: n = 4, i = 2% (from Table 1)

Brief Exercise 62

Bill will not have enough accumulated to take the trip. The future value of his

investment of $23,153 is $347 short of $23,500.

FV = $20,000 (1.15763* ) = $23,153

* Future value of $1: n = 3, i = 5% (from Table 1)

Brief Exercise 63

FV factor =

$26,600 = 1.33*

$20,000

Brief Exercise 64

John would be willing to invest no more than $12,673 in this opportunity.

PV = $16,000 (.79209* ) = $12,673

* Present value of $1: n = 4, i = 6% (from Table 2)

Brief Exercise 65

PV factor

= $13,200 = .825*

$16,000

65

Brief Exercise 66

Interest is paid for 12 periods at 1% (one-quarter of the annual rate).

FVA

= $500 (12.6825* )

= $6,341

Brief Exercise 67

Interest is paid for 12 periods at 1% (one-quarter of the annual rate).

FVAD

= $500 (12.8093* )

= $6,405

Brief Exercise 68

PVA

= $10,000 (4.10020* )

= $41,002

Brief Exercise 69

PVAD

= $10,000 (4.38721*)

= $43,872

PVA = $10,000

4.10020*

$41,002

PV

= $41,002

.87344*

$35,813

Or alternatively:

From Table 4,

PVA factor, n = 7, i = 7%

PVA factor, n = 2, i = 7%

= PV factor for deferred annuity

=

5.38929

1.80802

=

3.58127

The McGraw-Hill Companies, Inc., 2013

66

Annuity

6.71008*

PV = $6,000,0001 (12.40904* ) + 100,000,000 (.13137** )

PV = $74,454,240 + 13,137,000 = $87,591,240 = price of the bonds

1

$100,000,000 x 6% = $6,000,000

* Present value of an ordinary annuity of $1: n = 30, i = 7% (from Table 4)

** Present value of $1: n = 30, i = 7% (from Table 2)

PVAD = $55,000 (7.24689* ) = $398,579 = Liability

* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

67

EXERCISES

Exercise 61

1. FV = $15,000 (2.01220* ) = $30,183

* Future value of $1: n = 12, i = 6% (from Table 1)

* Future value of $1: n = 10, i = 8% (from Table 1)

* Future value of $1: n = 20, i = 12% (from Table 1)

* Future value of $1: n = 12, i = 4% (from Table 1)

Exercise 62

1. FV = $10,000 (2.65330* ) = $26,533

* Future value of $1: n = 20, i = 5% (from Table 1)

* Future value of $1: n = 20, i = 3% (from Table 1)

* Future value of $1: n = 30, i = 2% (from Table 1)

Exercise 63

1. PV = $20,000 (.50835* ) = $10,167

* Present value of $1: n = 10, i = 7% (from Table 2)

* Present value of $1: n = 12, i = 8% (from Table 2)

* Present value of $1: n = 20, i = 12% (from Table 2)

* Present value of $1: n = 8, i = 10% (from Table 2)

68

Exercise 64

Payment

$5,000

6,000

8,000

9,000

Total

First payment:

Second payment

Third payment

Fourth payment

x

x

x

x

PV of $1

i=8%

.92593

.85734

.73503

.63017

=

=

=

=

PV

$ 4,630

5,144

5,880

5,672

$21,326

n

1

2

4

6

Exercise 65

PV = $85,000 (.82645* ) = $70,248 = Note/revenue

* Present value of $1: n = 2, i = 10% (from Table 2)

Exercise 66

1.

2.

$36,289

$65,000

.55829*

3.

$15,884

$40,000

.3971*

4.

$46,651 =

$100,000

.46651*

5.

69

Exercise 67

1.

FVA

2.

3.

First deposit:

Second deposit

Third deposit

Fourth deposit

4.

Deposit

$2,000

2,000

2,000

2,000

Total

x

x

x

x

FV of $1

i=3%

1.60471

1.42576

1.26677

1.12551

=

=

=

=

FV

$ 3,209

2,852

2,534

2,251

$10,846

n

16

12

8

4

$2,000 x 4 = $8,000

610

Exercise 68

1.

PVA

= $5,000 (3.60478* )

= $18,024

2.

= $20,187

3.

First payment:

Second payment

Third payment

Fourth payment

Fifth payment

Payment

$5,000

5,000

5,000

5,000

5,000

Total

x

x

x

x

x

PV of $1

i = 3%

.88849

.78941

.70138

.62317

.55368

=

=

=

=

=

PV

$ 4,442

3,947

3,507

3,116

2,768

$17,780

n

4

8

12

16

20

611

Exercise 69

1.

2.

$242,980 =

$75,000

3.23973*

approximately 9%)

3.

$161,214 =

$20,000

8.0607*

approximately 15 years)

4.

$500,000 =

$80,518

6.20979*

approximately 6%)

5.

$250,000 =

3.16987*

$78,868

612

Exercise 610

Requirement 1

* Present value of $1: n = 5, i = 8% (from Table 2)

Requirement 2

Annuity amount = $100,000

5.8666*

* Future value of an ordinary annuity of $1: n = 5, i = 8% (from Table 3)

Annuity amount

= $17,046

Requirement 3

Annuity amount = $100,000

6.3359*

* Future value of an annuity due of $1: n = 5, i = 8% (from Table 5)

613

Exercise 611

1. Choose the option with the highest present value.

(1) PV = $64,000

(2) PV = $20,000 + 8,000 (4.91732* )

* Present value of an ordinary annuity of $1: n = 6, i = 6% (from Table 4)

(3) PV = $13,000 (4.91732* ) = $63,925

Alex should choose option (1).

* Future value of an ordinary annuity of $1: n = 10, i = 7% (from Table 3)

Exercise 612

PVA = $5,000

4.35526*

$21,776

PV

= $21,776

.82645*

$17,997

Or alternatively:

From Table 4,

PVA factor, n = 8, i = 10%

PVA factor, n = 2, i = 10%

= PV factor for deferred annuity

=

=

=

5.33493

1.73554

3.59939

614

Exercise 613

Annuity = $20,000 5,000 = $670 = Payment

22.39646*

* Present value of an ordinary annuity of $1: n = 30, i = 2% (from Table 4)

Exercise 614

PVA factor = $100,000 = 7.46938*

$13,388

* Present value of an ordinary annuity of $1: n = 20, i = ? (from Table 4, i =

approximately 12%)

Exercise 615

Annuity =

16.35143*

* Present value of an ordinary annuity of $1: n = 20, i = 2% (from Table 4)

5 years x 4 quarters = 20 periods

8% 4 quarters = 2%

615

Exercise 616

PV

PV

$1,200 =

.90573*

.90573*

1,200

$1,325

PVA =

14.99203*

$1,325

annuity amount

PVA =

$1,325

=

14.99203*

$88

Payment

Exercise 617

To determine the price of the bonds, we calculate the present value of the 40period annuity (40 semiannual interest payments of $12 million) and the lump-sum

payment of $300 million paid at maturity using the semiannual market rate of interest

of 5%. In equation form,

PV = $205,909,080 + 42,615,000 = $248,524,080 = price of the bonds

1

$300,000,000 x 4 % = $12,000,000

* Present value of an ordinary annuity of $1: n = 40, i = 5% (from Table 4)

** Present value of $1: n = 40, i = 5% (from Table 2)

616

Exercise 618

Requirement 1

To determine the price of the bonds, we calculate the present value of the 30period annuity (30 semiannual interest payments of $6 million) and the lump-sum

payment of $200 million paid at maturity using the semiannual market rate of interest

of 2.5%. In equation form,

PV = $6,000,0001 (20.93029* ) + 200,000,000 (.47674)

PV = $125,581,740 + 95,348,000 = $220,929,740 = price of the bonds

1

$200,000,000 x 3 % = $6,000,000

* Present value of an ordinary annuity of $1: n = 30, i = 2.5% (from Table 4)

** Present value of $1: n = 30, i = 2.5% (from Table 2)

Requirement 2

$220,929,740 x 2.5% = $5,523,244

Because the bonds were outstanding only for six months of the year, Singleton

reports only one-half years interest in 2013.

Exercise 619

Requirement 1

PVA = $400,000 (10.59401* ) = $4,237,604 = Liability

* Present value of an ordinary annuity of $1: n = 20, i = 7% (from Table 4)

Requirement 2

PVAD = $400,000 (11.33560* ) = $4,534,240 = Liability

* Present value of an annuity due of $1: n = 20, i = 7% (from Table 6)

Exercise 620

PVA factor = $2,293,984 = 11.46992*

$200,000

* Present value of an ordinary annuity of $1: n = 20, i = ? (from Table 4, i = 6%)

617

Exercise 621

List A

e

List B

1. Interest

m 2.

j

3.

4.

5.

6.

7.

8.

9.

b 10.

h 11.

g 12.

f 13.

agreement begins.

Monetary asset

b. The rate at which money will actually grow

during a year.

Compound interest

c. First cash flow occurs on the first day of the

agreement.

Simple interest

d. The amount of money that a dollar will grow

to.

Annuity

e. Amount of money paid/received in excess of

amount borrowed/lent.

Present value of a single f. Obligation to pay a sum of cash, the amount

amount

of which is fixed.

Annuity due

g. Money can be invested today and grow to a

larger amount.

Future value of a single h. No fixed dollar amount attached.

amount

Ordinary annuity

i. Computed by multiplying an invested amount

by the interest rate.

Effective rate or yield

j. Interest calculated on invested amount plus

accumulated interest.

Nonmonetary asset

k. A series of equal-sized cash flows.

Time value of money

l. Amount of money required today that is

equivalent to a given future amount.

Monetary liability

m. Claim to receive a fixed amount of money.

618

CPA Exam Questions

1. b. PV = FV x PV factor,

PV=$25,458 x 0.3075 = $7,828

2. d. The sales price is equal to the present value of the note payments:

Present value of first payment

Present value of last six payments:

$60,000 x 4.36

Sales price

$ 60,000

261,600

$321,600

4. b. First solve for present value of a four-year ordinary annuity:

PVA = $100 x 3.03735 = $304

Then discount back two years:

PV = $304 x 0.79719 = $242

5. d. PVAD = $100,000 x 9.24424 = $924,424

6. a. PVA = $100 x 5.65022 = $565 (present value of the interest payments)

PV = $1,000 x 0.32197 = $322 (present value of the face amount)

Total present value = $887 = current market value of the bond

7. a. PVA = PMT x PVA factor

$15,000 = PMT x 44.955

PMT = $334

619

1. d. Both future value tables will be used because the $75,000 already in the

account will be multiplied times the future value factor of 1.26 to determine

the amount three years hence, or $94,500. The three payments of $4,000

represent an ordinary annuity. Multiplying the three-period annuity factor

(3.25) by the payment amount ($4,000) results in a future value of the

annuity of $13,000. Adding the two elements together produces a total

account balance of $107,500.

2. a. An annuity is a series of cash flows or other economic benefits occurring at

fixed intervals, ordinarily as a result of an investment. Present value is the

value at a specified time of an amount or amounts to be paid or received

later, discounted at some interest rate. In an annuity due, the payments occur

at the beginning, rather than at the end, of the periods. Thus, the present

value of an annuity due includes the initial payment at its undiscounted

amount. This lease should be evaluated using the present value of an annuity

due.

620

PROBLEMS

Problem 61

Choose the option with the lowest present value of cash outflows, net of the

present value of any cash inflows (Cash outflows are shown as negative amounts; cash

inflows as positive amounts).

Machine A:

PV = $48,000 1,000 (6.71008* ) + 5,000 (.46319** )

* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)

** Present value of $1: n = 10, i = 8% (from Table 2)

PV = $52,394

Machine B:

PV = $40,000 4,000 (.79383) 5,000 (.63017) 6,000 (.54027)

PV of $1: i = 8%

(from Table 2)

n=3

n=8

n=6

PV = $49,568

Esquire should purchase machine B.

Problem 62

1. PV = $10,000 + 8,000 (3.79079* ) = $40,326 = Equipment

* Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)

* Future value of an annuity due of $1: n = 5, i = 6% (from Table 5)

5.9753

Annuity amount = $66,942 = Required annual deposit

* Present value of an annuity due of $1: n = 20, i = 10% (from Table 6)

Solutions Manual, Vol.1, Chapter 6

621

Problem 63

Choose the option with the lowest present value of cash payments.

1. PV = $1,000,000

2. PV = $420,000 + 80,000 (6.71008* ) = $956,806

* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)

* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

* Present value of $1: n = 5, i = 8% (from Table 2)

Problem 64

The restaurant should be purchased if the present value of the future cash

flows discounted at a 10% rate is greater than $800,000.

PV = $80,000 (4.35526* ) + 70,000 (.51316** ) + 60,000 (.46651**)

n=7

n=8

n=9

n = 10

n = 10

** Present value of $1: i = 10% (from Table 2)

Since the PV is less than $800,000, the restaurant should not be purchased.

622

Problem 65

The maximum amount that should be paid for the store is the present value of the

estimated cash flows.

Years 15:

PVA = $70,000

3.99271* =

$279,490

Years 610:

PVA = $70,000

3.79079* =

$265,355

PV

= $265,355

.68058*

$180,595

Years 1120:

PVA = $70,000

5.65022*

$395,515

PV

= $395,515

.62092*

$245,583

PV

= $245,583

.68058*

$167,139

PV

= $400,000

$54,424

$681,648

623

Problem 66

1.

PV of $1 factor = $30,000 = .5000*

$60,000

* Present value of $1: n = ?, i = 8% (from Table 2, n = approximately 9 years)

2.

PVA

Annuity factor = Annuity amount

Annuity factor = $28,700 = 4.1000*

$7,000

* Present value of an ordinary annuity of $1: n = 5, i = ? (from Table 4, i =

approximately 7%)

3.

PVA

Annuity amount = Annuity factor

Annuity amount = $10,000 =

6.41766*

$1,558

= Payment

624

Problem 67

Requirement 1

PVA

Annuity amount = Annuity factor

Annuity amount = $250,000 = $78,868 = Payment

3.16987*

* Present value of an ordinary annuity of $1: n = 4, i = 10% (from Table 4)

Requirement 2

PVA

Annuity amount = Annuity factor

Annuity amount = $250,000 = $62,614 = Payment

3.99271*

* Present value of an ordinary annuity of $1: n = 5, i = 8% (from Table 4)

Requirement 3

PVA

Annuity factor = Annuity amount

Annuity factor = $250,000 = 4.86845*

$51,351

* Present value of an ordinary annuity of $1: n = ?, i = 10% (from Table 4, n = approximately

7 payments)

Requirement 4

PVA

Annuity factor = Annuity amount

Annuity factor = $250,000 = 2.40184*

$104,087

* Present value of an ordinary annuity of $1: n = 3, i = ? (from Table 4, i = approximately

12%)

625

Problem 68

Requirement 1

Present value of payments 46:

PVA = $40,000

2.48685*

$99,474

PV

= $99,474

.75131*

$74,736

$ 62,171 (PV of payments 13: $25,000

2.48685* )

$136,907

The note payable and corresponding building should be recorded at $136,907.

Or alternatively:

* Present value of an ordinary annuity of $1: n = 3, i = 10% (from Table 4)

From Table 4,

PVA factor, n = 6, i = 10%

PVA factor, n = 3, i = 10%

= PV factor for deferred annuity

= 4.35526

= 2.48685

= 1.86841**

Requirement 2

$136,907 x 10% = $13,691 = Interest in the year 2013

626

Problem 69

Choose the alternative with the highest present value.

Alternative 1:

PV = $180,000

Alternative 2:

PV = PVAD = $16,000 (11.33560* ) = $181,370

* Present value of an annuity due of $1: n = 20, i = 7% (from Table 6)

Alternative 3:

PVA = $50,000

7.02358*

$351,179

PV

= $351,179

.54393*

$191,017

Or, alternatively (for 3):

PV = $50,000 (3.82037* )

= $191,019

(difference due to rounding)

From Table 4,

PVA factor, n = 19, i = 7%

PVA factor, n = 9, i =7%

= PV factor for deferred annuity

= 10.33560

= 6.51523

= 3.82037*

PVAD factor, n = 20, i = 7%

PVAD factor, n = 10, i = 7%

= PV factor for deferred annuity

Solutions Manual, Vol.1, Chapter 6

= 11.33560

= 7.51523

= 3.82037*

The McGraw-Hill Companies, Inc., 2013

627

Problem 610

PV = $20,000 (3.79079* ) + 100,000 (.62092** ) = $137,908

* Present value of an ordinary annuity of $1: n = 5, i = 10% (from Table 4)

** Present value of $1: n = 5, i = 10% (from Table 2)

628

Problem 611

Requirement 1

PVAD = Annuity amount x Annuity factor

PVAD

Annuity amount = Annuity factor

Annuity amount = $800,000

7.24689*

* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

Requirement 2

Annuity amount = $800,000

6.71008*

* Present value of an ordinary annuity of $1: n = 10, i = 8% (from Table 4)

Requirement 3

PVAD = (Annuity amount x Annuity factor) + PV of residual

Annuity amount =

PVAD PV of residual

Annuity factor

PV of residual = $50,000

.46319*

= $23,160

7.24689*

* Present value of an annuity due of $1: n = 10, i = 8% (from Table 6)

629

Problem 612

Requirement 1

PVA = Annuity amount x Annuity factor

PVA

Annuity amount = Annuity factor

Annuity amount = $800,000

7.36009*

* Present value of an ordinary annuity of $1: n = 10, i = 6% (from Table 4)

Requirement 2

Annuity amount = $800,000

15.32380*

* Present value of an annuity due of $1: n = 20, i = 3% (from Table 6)

Requirement 3

Annuity amount = $800,000

44.9550*

* Present value of an ordinary annuity of $1: n = 60, i = 1% (given)

630

Problem 613

Choose the option with the lowest present value of cash outflows, net of the

present value of any cash inflows. (Cash outflows are shown as negative amounts;

cash inflows as positive amounts)

1. Buy option:

PV = $160,000 5,000 (5.65022* ) + 10,000 (.32197** )

* Present value of an ordinary annuity of $1: n = 10, i = 12% (from Table 4)

** Present value of $1: n = 10, i = 12% (from Table 2)

PV = $185,031

2. Lease option:

PVAD = $25,000 (6.32825* ) = $158,206

* Present value of an annuity due of $1: n = 10, i = 12% (from Table 6)

631

Problem 614

Requirement 1

Tinkers:

PVA = $20,000

7.19087*

$143,817

PV

= $143,817

.81162*

$116,725

Evers:

PVA = $25,000

7.19087*

$179,772

PV

= $179,772

.73119*

$131,447

Chance:

PVA = $30,000

7.19087*

$215,726

PV

= $215,726

.65873*

$142,105

Or, alternatively:

Deferred annuity factors:

Employee

Tinkers

Evers

Chance

7.54879 (n = 17)

7.70162 (n = 18)

7.83929 (n = 19)

632

=

1.71252 (n = 2)

=

2.44371 (n = 3)

=

3.10245 (n = 4)

Deferred annuity

factor

5.83627

5.25791

4.73684

Present value of pension obligations at 12/31/13:

Tinkers: $20,000 x 5.83627 = $116,725

Evers: $25,000 x 5.25791 = $131,448*

Chance: $30,000 x 4.73684 = $142,105

*rounding difference

Requirement 2

Present value of pension obligations as of December 31, 2016:

Employee

PV as of 12/31/13

Tinkers

Evers

Chance

$116,725

131,448

142,105

FV of $1 factor,

n = 3, i = 11%

1.36763

x

1.36763

x

1.36763

x

Total present value,

12/31/16

FV as of 12/31/16

=

=

=

$159,637

179,772

194,347

$533,756

FVAD = Annuity amount x Annuity factor

FVAD

Annuity amount = Annuity factor

Annuity amount = $533,756 =

3.7097*

$143,881

633

Problem 615

Bond liability:

PV = $4,000,0001 (18.40158* ) + 100,000,000 (.17193** )

PV = $73,606,320 + 17,193,000 = $90,799,320 = Initial bond liability

1

$100,000,000 x 4 % = $4,000,000

* Present value of an ordinary annuity of $1: n = 40, i = 4.5% (from Table 4)

** Present value of $1: n = 40, i = 4.5% (from Table 2)

Lease liability:

Lease A:

PVAD = $200,000 (9.36492* ) = $1,872,984 = Liability

* Present value of an annuity due of $1: n = 20, i = 10% (from Table 6)

Lease B:

PVAD = $220,000 x 8.82371* = $1,941,216

* Present value of an annuity due of $1: n = 17, i = 10% (from Table 6)

PV

PVA = $220,000 x 8.02155* = $1,764,741

* Present value of an ordinary annuity of $1: n = 17, i = 10% (from Table 4)

PV

PV = $220,000 (6.62938* )

From Table 4,

PVA factor, n = 19, i = 10%

PVA factor, n = 2, i = 10%

= PV factor for deferred annuity

=

=

=

8.36492

1.73554

6.62938*

The companys balance sheet would include a liability for bonds of $90,799,320 and a

liability for leases of $3,331,439 ($1,872,984 + $1,458,455).

The McGraw-Hill Companies, Inc., 2013

634

CASES

Ethics Case 61

The ethical issue is that the 21% return implies an annual return of 21% on an

investment and misrepresents the funds performance to all current and future

stakeholders. Interest rates are usually assumed to represent an annual rate, unless

otherwise stated. Interested investors may assume that the return for $100 would be

$21 per year, not $21 over two years. The Damon Investment Company ad should

explain that the 21% rate represented appreciation over two years.

635

Analysis Case 62

Sally should choose the alternative with the highest present value.

Alternative 1:

PV = $50,000

Alternative 2:

PV = PVAD = $10,000 (5.21236* ) = $52,124

* Present value of an annuity due of $1: n = 6, i = 6% (from Table 6)

Alternative 3:

PVA

= $22,000

2.67301*

$58,806

PV

$58,806

.89000*

$52,337

Or, alternatively (for 3):

PV = $22,000 (2.37897* ) = $52,337

From Table 4,

PVA factor, n = 5, i = 6%

PVA factor, n = 2, i = 6%

= PV factor for deferred annuity

= 4.21236

= 1.83339

= 2.37897*

PVAD factor, n = 6, i = 6%

PVAD factor, n = 3, i = 6%

= PV factor for deferred annuity due

= 5.21236

= 2.83339

= 2.37897*

636

Communication Case 63

Suggested Grading Concepts and Grading Scheme:

Content (65%)

______ 25 Explanation of the method used (present value) to

compare the two contracts.

______ 30 Presentation of the calculations.

49ers PV = $6,989,065

Cowboys PV = $6,492,710

______ 10 Correct conclusion.

____

______ 65 points

Writing (35%)

______ 5 Proper letter format.

______ 6

a player's agent.

____ Introduction that states purpose.

____ Paragraphs that separate main points.

______ 12 English

____ Sentences grammatically clear and well organized,

concise.

____ Word selection.

____ Spelling.

____ Grammar and punctuation.

____

______ 35 points

637

Analysis Case 64

The settlement was determined by calculating the present value of lost future

income ($200,000 per year) discounted at a rate that is expected to approximate the

time value of money. In this case, the discount rate, i, apparently is 7% and the

number of periods, n, is 25 (the number of years to Johns retirement). Johns

settlement was calculated as follows:

$200,000

annuity

amount

11.65358*

$2,330,716

Note: In the actual case, Johns present salary was increased by 3% per year to reflect future salary

increases.

638

Judgment Case 65

Purchase price of new machine

Sales price of old machine

Incremental cash outflow required

$150,000

(100,000)

$ 50,000

The new machine should be purchased if the present value of the savings in

operating costs of $8,000 ($18,000 10,000) plus the present value of the salvage

value of the new machine exceeds $50,000.

PV = ($8,000 x 3.99271* ) + ($25,000 x .68058** )

PV = $31,942 + 17,015

PV = $48,957

* Present value of an ordinary annuity of $1: n = 5, i = 8% (from Table 4)

** Present value of $1: n = 5, i = 8% (from Table 2)

639

Requirement 1

The effective interest rate can be determined by solving for the unknown present

value of $1 factor for 20 semiannual periods (20112020):

PV of $1 factor = $ 194 = .71193*

$272.5

* Present value of $1: n = 20, i = ? (from Table 2, i = approximately 1.5%)

calculator or Excel will produce the same rate. The companys long-term debt

disclosure note indicates that the annual rate is 3.0%

Requirement 2

Using a 1.5% effective semiannual rate and 40 periods:

PV = $1,000 (.55126* ) = $551.26

* Present value of $1: n = 40, i = 1.5% (from Table 2)

640

Requirement 1

The effective interest rate can be determined by solving for the unknown present

value of an ordinary annuity of $1 factor for seven periods:

PV of an ordinary annuity of $1 factor = $738 = 4.824*

$153

* Present value of an ordinary annuity $1: n = 7, i = ? (from Table 4, i = approximately 10%)

In row 7 of Table 4, the value of 4.86842 is in the 10% column. So, 10% is the

approximate effective interest rate. A financial calculator or Excel will produce the

same result.

Requirement 2

The effective interest rate can be determined by solving for the unknown present

value of an annuity due $1 factor for seven periods:

PV of an annuity due of $1 factor =

$738 = 4.824

$153

In row 7 of Table 6, the value of 5.11141 is in the 12% column. So, the

approximate effective interest rate is slightly higher than 12%. A financial calculator

or Excel will produce the same result.

641