Question
In: Accounting
On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual...
On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)
- Bought a delivery truck and agreed to pay $61,400 at the end of three years.
- Rented an office building and was given the option of paying $11,400 at the end of each of the next three years or paying $30,000 immediately.
- Established a savings account by depositing a single amount that will increase to $92,800 at the end of seven years.
- Decided to deposit a single sum in the bank that will provide 8 equal annual year-end payments of $41,400 to a retired employee (payments starting December 31 of this year).
Solutions
Expert Solution
| 1. Cost of the Truck is the Present Value of $61,400 | |||||||||
| Rate = 8% | |||||||||
| Term 3 year | |||||||||
| Present Value of $1 = (1/(1+8%)^3) = 0.79383 | |||||||||
| Present Value of 61,600 = 61,400*0.79383= $48741 (rounded off) | |||||||||
| 2. Now whether to pay in one installment or pay upfront will depend on the PV of Outflow under both option | |||||||||
| Present Value of Outflow in case of upfront payment = $30000 | |||||||||
| Present Value of Outflow in case of installment payment = 11,400 * PVA of 1$ | |||||||||
| PVA of 1$ = 2.577097 | |||||||||
| PVA of 11,400 = 11,400*2.577097 = $29,379 | |||||||||
| Since Present Value of Installment payment is lower than upfront payment, hence payment in installment | |||||||||
| 3. Amount to be invested today to get $92,800 at the end of 7 years = Present Value of 92800 | |||||||||
| PV of 1$ with 7 year term = 0.58349 | |||||||||
| Present Value for 92,800 = 92800*0.58349 = $54148 | |||||||||
| 4. Single sum which must be deposited today to get 41,400 for 8 year is calculated as below | |||||||||
| Present Value of Annuity of 1$ for 8 Year @ 8% = 5.746639 | |||||||||
| Present Value of Annuity of $41,400 = 41,400*5.746639 = $237911 | |||||||||
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