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Chapter 12: Q13SE_2 (page 657)

S12A-13 Determining present value

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

No, the preference cannot be changed because in 12% present value is not high as compare to 6%.

Step by step solution

01

Definition of present value

Present value is basic tool of the finance that state that the amount invested in present have the more value than the amount invested in future.

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=12%,鈥塶=鈥�8=$8,750脳鈥夆赌�4.96764=$43,4667

2. Present Value 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=12%,鈥塶=鈥�8=$100,650脳鈥夆赌�0.40388=$40,651

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Most popular questions from this chapter

Accounting for long-term notes payable transactions

Consider the following note payable transactions of Caleb Video Productions.

2018

Oct. 1 Purchased equipment costing \(80,000 by issuing a five-year, 8% note

payable. The note requires annual principal payments of \)16,000 plus

interest each October 1.

Dec. 31 Accrued interest on the note payable.

2019

Oct. 1 Paid the first installment on the note.

Dec. 31 Accrued interest on the note payable.

Requirements

1. Journalize the transactions for the company.

2. Considering the given transactions only, what are Caleb Video Productions鈥� total

liabilities on December 31, 2019?

What is a mortgage payable?

Analyzing and journalizing bond transactions

On January 1, 2018, Electricians Credit Union (ECU) issued 8%, 20-year bondspayable with face value of $400,000. The bonds pay interest on June 30 andDecember 31. The issue price of the bonds is 104.

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 last interestpayment has already been recorded.

What is the carrying amount of a bond?

Analyzing and journalizing bond transactions

On January 1, 2018, Nurses Credit Union (NCU) issued 8%, 20-year bonds payablewith face value of $600,000. The bonds pay interest on June 30 and December 31.

Requirements

1. If the market interest rate is 7% when NCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 9% when NCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 92. 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 beenrecorded.
See all solutions

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