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Chapter 6: Q3E (page 303)

Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.) (a) What is the future value of \(7,000 at the end of 5 periods at 8% compounded interest? (b) What is the present value of \)7,000 due 8 periods hence, discounted at 6%? (c) What is the future value of 15 periodic payments of \(7,000 each made at the end of each period and compounded at 10%? (d) What is the present value of \)7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?

Short Answer

Expert verified

The future value of $7,000 compounded annually at 8% will be $10,285, the present value of $7,000 discounted at 6% will be $4,392, the future value of periodic payments of $7,000 will be $222,408, and the present value of $7,000 periodically will be $87,235.

Step by step solution

01

Step 1:Computation of future value

FutureValue=PresentValue×FVfactor=7,000×1.4693=$10,285

02

Computation of Present value

PresentValue=FutureValue×PVfactor=7,000×0.62741=$4,392

03

Calculation of future value of the periodic payment

FutureValue=PeriodicPayment×FVfactor=7,000×31.7725=$222,408

04

Calculation of Present Value of the periodic payment

PresentValue=PeriodicPayment×PVfactor=7,000×12.4622=$87,235

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Most popular questions from this chapter

What would you pay for a \(100,000 debenture bond that matures in 15 years and pays \)5,000 a year in interest if you wanted to earn a yield of: (a) 4%? (b) 5%? (c) 6%?

Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of \(50,000 each for 10 years. The first installment begins six months from the date the customer takes delivery of the damaged inventory. Johnson’s management estimates that the fair value of the damaged inventory is \)679,517.

Accounting

(a) What interest rate is Johnson implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding.

(b) At what dollar amount do you think Johnson should record the note receivable on the day the customer takes delivery of the damaged inventory?

Analysis

Assume the note receivable for damaged inventory makes up a significant portion of Johnson’s assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why.

Principles

The Financial Accounting Standards Board has issued an accounting standard that allows companies to report assets such as notes receivable at fair value. Discuss how fair value versus historical cost potentially involves a trade-off of one desired quality of accounting information against another.

(Analysis of Alternatives) Julia Baker died, leaving to her husband Brent an insurance policy contract that provides that the beneficiary (Brent) can choose any one of the following four options. (a) \(55,000 immediate cash. (b) \)4,000 every 3 months payable at the end of each quarter for 5 years. (c) \(18,000 immediate cash and \)1,800 every 3 months for 10 years, payable at the beginning of each 3-month period. (d) \(4,000 every 3 months for 3 years and \)1,500 each quarter for the following 25 quarters, all payments payable at the end of each quarter.

Instructions If money is worth 2½% per quarter, compounded quarterly, which option would you recommend that Brent exercise?

Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods. (a) \(30,000 receivable at the end of each period for 8 periods compounded at 12%. (b) \)30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%

Property/casualty insurance companies have been criticized because they reserve for the total loss as much as 5 years before it may happen. The IRS has joined the debate because it says the full reserve is unfair from a taxation viewpoint. What do you believe is the IRS position?
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