# Text and Cases Problem 8

For each of the following situations, the present value concept should be applied: 1. Your wealthy aunt just established a trust fund for you that will accumulate to a total of $100,000 in 12 years. Interest on the trust fund is compounded annually at an 8% rate. How much is in your trust fund today? 2. On January 1, you will purchase a new car. The automobile dealer will allow you to make increasing annual December 31 payments over the following four years. The amounts of these payments are $4,000; $4,500; $5,000; $6,000. On this same January 1, your mother will lend you just enough money to enable you to meet these payments. Interest rates are expected to be 8% for the next five years. Assuming that you can earn annual compounding interest by depositing the loan from your mother in a bank, what is the minimum amount your mother must loan you to enable you to meet the car payments? 3. In settlement of a claim for your recently wrecked car, your insurance company will pay you either a lump sum today or three annual payments of $3,100 starting one year from now. Interest rates are expected to be 6 percent for the next five years. What is the least amount of money that you should be willing to accept today? 4. What is the present value of $3,000 a year to be received in years 3 through 11, assuming a 12 percent discount rate?

Problem 8-5

How would the following be disclosed on W & H Company’s financial statements? The balance sheet was dated December 21, 2010, and the financial statements were issued February 14, 2011. 1. The Internal Revenue Service has claimed that W&H Company owed $450,000 of additional taxes for the first quarter of 2010; the claim was made in a suit filed on January 25, 2011. W & H Company’s tax adviser estimates that the actual amount that will be paid is between $270,000 and $318,000. 2. On January 15, 2011, a fire destroyed one of W & H Company’s warehouses. The warehouse had...

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