Question

On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

1. Promised to pay a fixed amount of $6,500 at the end of each year for eight years and a one-time payment of $116,000 at the end of the 8th year.
2. Established a plant remodeling fund of $490,750 to be available at the end of Year 9. A single sum that will grow to $490,750 will be deposited on January 1 of this year.
3. Agreed to pay a severance package to a discharged employee. The company will pay $75,500 at the end of the first year, $113,000 at the end of the second year, and $150,500 at the end of the third year.
4. Purchased a $172,500 machine on January 1 of this year for $34,500 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year.

1. In transaction (a), determine the present value of the debt. (Round your answer to nearest whole dollar.)

Present vaule _______

2-a. In transaction (b), what single sum amount must the company deposit on January 1 of this year? (Round your answer to nearest whole dollar.)

Amount to deposit _____

2-b. What is the total amount of interest revenue that will be earned? (Round your answer to nearest whole dollar.)

Intrest revenue________

3. In transaction (c), determine the present value of this obligation. (Round your answer to nearest whole dollar.)

Present vaule________

Answer 1

1) we pay a fixed amount of 6500 at the end of each year for eight years and one time payment of 116,000 at the end of Eigth year.

Here payment of 6500 is each year at the end of 8 th,so we can use present value of annuity factor to bring to present116000 is one time payment we can present value factor to bring to present value

Present value of debt = 6500* PVA(7%,8YEARS) + 116,000* PV(7%,8years)

Present value of debt = 6500* 5.971 + 116,000× 0.582

Present value of debt = 106,323.5

2-a)we need fund for remodeling of machine at the end of 9 the year amounting to 490,750.

This is single outflows ,so,we can bring to present value by using present value factor.

Present value = 490,750× pv(7%,9years)

Present value = 490,750 0.544 = 266,968.

2-b)

If we invest 266,968 @7% for 9 years ,you will receive 490,750 at the end of 9 the years.

Interest = future value- present value

Interest revenue = 490,750- 266,968 =223,782.

3)

Year	amount	PVF factor @7%	present value
End of First year	75,000	0.935	70125
End of second year	113,000	0.873	98649
End of third year	150,500	0.816	122808
		Present value	291,582.

Present value = 291,582.