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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:

Present Value= Principal Amount× PV factor i=12%, n= 8=$8,750×  4.96764=$43,4667

2. Present Value is $49,650

3. Present Value:

Present Value= Principal Amount× PV factor i=12%, n= 8=$100,650×  0.40388=$40,651

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Most popular questions from this chapter

Journalizing bond issuance and interest payments

On June 30, Parker Company issued 11%, five-year bonds payable with a face value

of $120,000. The bonds are issued at face value and pay interest on June 30 and

December 31.

Requirements

1. Journalize the issuance of the bonds on June 30.

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Determining the present value of bonds payable

Interest rates determine the present value of future amounts. (Round to the nearest

dollar.)

Requirements

1. Determine the present value of 10-year bonds payable with face value of $86,000

and stated interest rate of 14%, paid semiannually. The market rate of interest is

14% at issuance.

2. Same bonds payable as in Requirement 1, but the market interest rate is 16%.

3. Same bonds payable as in Requirement 1, but the market interest rate is 12%.

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