PM-17
Plan 1: PV = $600,000
PM-18 (AICPA adapted solution)
Table
(Answer) Table Titles (Not Required)
Part a. 1. C Table A: Present value of $1
2. D Table B: Future value of an annuity of $1 in
PM-18 (continued)
Part b.
1.
Assuming 6 Payments Assuming 7 Payments
$2,500 x 7.7156 = $19,289.00 $2,500 x 9.4872 = $23,718
$22,500 $8,275
TVM-35
PM-18 (continued)
Part b (continued)
2.
Total funds needed $200,000.00
PM-19
1. o
F = 6%i 10,n
o
F
x C ==
$200,000
PM-19 (continued)
1. (continued)
o
F = 10%i 10,n
o
F x C ==
2. (a)
Years 1-10
$3,000
PM-19
2. (a) (continued)
At the end of 30 years, Jordy will have $687,719.22 ($321,657.11 + $206,687.86
+ $159,374.25) in his savings if it earns 10%.
TVM-38
PM-19 (continued)
2. (a) (continued)
At the end of 30 years, Jordy will have $376,649.74 ($126,817.78 + $118,024.01
+ $131,807.95) in his savings if it earns 6%.
(b)
TVM-39
PM-19 (continued)
2. (continued)
(c) P = 10%i 30,n
P x F ==
3. Value at end = [ 1218%i 2×12,n
F x P ÷== ] – [ 1218%i 2×12,n
o
F
x C ÷== ]
of year 2
TVM-40
ANSWERS TO CASES
CM-1
Annual cost of the 1-year plan: $4,480.00
Annual cost of the 5-year plan:
The 3-year plan is the least expensive plan given the 12% rate. The savings over the other
two plans are computed as follows:
CM-2
Plan 1. Purchase the equipment
The present value of the purchase alternative equals the sum of the initial cash payment,
less the present value of the resale value to be received in 5 years, computed as follows:
CM-2 (continued)
Plan 2. Lease the equipment
The present value of leasing the equipment equals the present value of $9,100 per year
for 5 years, discounted at 12%. Since the payments are made at the beginning of each
year, this is an annuity due situation.
*Note that when the equipment is leased, the resale value does not accrue to Taylor
Company, hence it is not included in the present-value computation.
CM-3
1. If White takes the discount, it must pay $396,000. By not taking the discount, White can
use the $396,000 for 10 days (assuming that White follows its usual policy of paying after
30 days). For waiting the extra 10 days, the company must pay an additional $4,000.
The effective annual interest cost is
CM-3 (continued)
1. (continued)
2. The effective annual interest cost of not taking the discount is lower in this case, since
White could use the $396,000 for 40 days instead of just 10 days. The effective annual
interest cost of waiting the entire 60-day period is
3. It has become less desirable for White to borrow from the bank. By waiting one day, or
40 days past the discount period, White must pay $4,000 more than if the discount were
CM-4
1. The amount of interest earned equals the future value minus the present value,
computed as follows:
TVM-43
CM-4 (continued)
2. If she had invested $10,000 a year instead:
CM-5
1. Either argument may be correct depending on the circumstances. If the note was given
solely in exchange for cash, then the president is correct. However, the requirements of
2. Since the interest amount at 4% is compounded annually, the future value due in 5 years
is:
CM-6
Whether or not Perry would pay back the loan would depend on her reinvestment rate.
If she could earn more than 12% on some investment, then she would be earning more