Present Value

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  • Topic: Money
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  • Published : March 15, 2013
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On January 1, 2011, Boston Company completed the following transactions (use a 9 percent annual interest rate for all transactions a. Borrowed $103,000 for nine years. Will pay $9,270 interest at the end of each year and repay the $103,000 at the end of the 9th year. In transaction (a), determine the present value of the debt. 1. We find PV of ANnuity of $1 for 9 Yrs at 9% = 5.9952

PV of $1 for 9Yrs @9% = 0.4604
So PV of debt = 9270*5.9952 + 103000*0.4604 = $1,02,997

b. Established a plant addition fund of $520,000 to be available at the end of year 8. A single sum that will grow to $520,000 will be deposited on January 1, 2011. In transaction (b), what single sum amount must the company deposit on January 1, 2011? PV of $1 for 8Yrs @9% = 0.5019

So Single amount deposited = 520000*0.5019 = $2,60,988

c. Agreed to pay a severance package to a discharged employee. The company will pay $84,000 at the end of the first year, $122,500 at the end of the second year, and $146,000 at the end of the third year. In transaction (c), determine the present value of this obligation PV = 84000*PVIF(1,9%) + 122500*PVIF(2,9%)+146000*PVIF(3,9%)

= 84000*0.9174 + 122500*0.8417 + 146000*0.7722 =$2,92,911

d. Purchased a $130,000 machine on January 1, 2011, and paid cash, $35,000. A eight-year note payable is signed for the balance. The note will be paid in eight equal year-end payments starting on December 31, 2011. What is the total amount of interest revenue that will be earned? So Note Payable amt = 130000-35000 = 95000

So PVIFA(8,9%) = 5.5348
So Annual Inst = 95000/5.5348 = $17,164
So 8 Ints =8*17164 = $1,37,312
So Int Rev = 137312-95000 = $42,312
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