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Chapter 12: Q13SE_1 (page 657)

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Short Answer

Expert verified

Present value of scenario 1,2 and 3 are $54,336, $49650 and $63,108. Scenario 3 has highest yield among all scenarios.

Step by step solution

01

Definition of present value

The current value calculated by using the specified formula for the amount invested by the investor in future date.

02

calculation of present value

1.Present value:

笔谤别蝉别苍迟鈥塚补濒耻别=鈥塒谤颈苍肠颈辫补濒鈥碱尘辞耻苍迟脳鈥塒痴鈥塮补肠迟辞谤鈥塱=6%,鈥塶=鈥�8=$8,750脳鈥�6.20979=$54,336

2.Present Value of this scenario is $49,650

3.Present Value:

笔谤别蝉别苍迟鈥塚补濒耻别=鈥塒谤颈苍肠颈辫补濒鈥碱尘辞耻苍迟脳鈥塒痴鈥塮补肠迟辞谤鈥塱=6%,鈥塶=鈥�8=$100,650脳鈥夆赌�0.627=$63,108

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Most popular questions from this chapter

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Determining the present value of bonds payable and journalizing

using the effective-interest amortization method

Brad Nelson, Inc. issued $600,000 of 7%, six-year bonds payable on January 1, 2018.

The market interest rate at the date of issuance was 6%, and the bonds pay interest

semiannually.

Requirements

1. How much cash did the company receive upon issuance of the bonds payable?(Round to the nearest dollar.)

2. Prepare an amortization table for the bond using the effective-interest method,through the first two interest payments (Round to the nearest dollar.)

3. Journalize the issuance of the bonds on January 1, 2018, and the first and secondpayments of the semiannual interest amount and amortization of the bonds onJune 30, 2018, and December 31, 2018. Explanations are not required.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

On January 1, 2018, Fox Corporation signed an \(80,000, four-year, 4% note. The loan required Fox to make payments annually

on December 31 of \)20,000 principal plus interest.

1. Journalize the issuance of the note on January 1, 2018.

2. Journalize the first payment on December 31, 2018.
See all solutions

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