Spiceland SM 7ech06

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Chapter 6
Time Value of Money Concepts
QUESTIONS FOR REVIEW OF KEY TOPICS

Question 6-1
Interest is the amount of money paid or received in excess of the amount borrowed or lent.
Question 6-2
Compound interest includes interest not only on the original invested amount but also on the
accumulated interest from previous periods.
Question 6-3
If interest is compounded more frequently than once a year, the effective rate or yield will be
higher than the annual stated rate.
Question 6-4
The three items of information necessary to compute the future value of a single amount are
the original invested amount, the interest rate (i) and the number of compounding periods (n).
Question 6-5
The present value of a single amount is the amount of money today that is equivalent to a given
amount to be received or paid in the future.
Question 6-6
Monetary assets and monetary liabilities represent cash or fixed claims/commitments to
receive/pay cash in the future and are valued at the present value of these fixed cash flows. All other
assets and liabilities are nonmonetary.
Question 6-7
An annuity is a series of equal-sized cash flows occurring over equal intervals of time.
Question 6-8
An ordinary annuity exists when the cash flows occur at the end of each period. In an annuity
due the cash flows occur at the beginning of each period.
Question 6-9
Table 2 lists the present value of $1 factors for various time periods and interest rates. The
factors in Table 4 are simply the summation of the individual PV of $1 factors from Table 2.
Solutions Manual, Vol.1, Chapter 6
The McGraw-Hill Companies, Inc., 2007

6-1
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Answers to Questions (continued)

Question 6-10
Present
Value
?
0
Year 1
Year 2
Year 3
Year 4
___________________________________________
$200
$200
$200
n = 4, i = 10%
$200
Question 6-11
Present
Value
?
0
Year 1
Year 2
Year 3
Year 4
___________________________________________
$200
$200
$200
$200
n = 4, i = 10%
Question 6-12
A deferred annuity exists when the first cash flow occurs more than one period after the date
the agreement begins.
Question 6-13
The formula for computing present value of an ordinary annuity incorporating the ordinary
annuity factors from Table 4 is:
PVA = Annuity amount x Ordinary annuity factor
Solving for the annuity amount,
PVA
Annuity amount =
Ordinary annuity factor
The annuity factor can be obtained from Table 4 at the intersection of the 8% column and 5
period row.
Question 6-14
Annuity amount =
Annuity amount =
$500
3.99271
$125.23

6-2
Intermediate Accounting, 4/e
Answers to Questions (concluded)

Question 6-15
Companies frequently acquire the use of assets by leasing rather than purchasing them. Leases
usually require the payment of fixed amounts at regular intervals over the life of the lease. Certain
long-term, noncancelable leases are treated in a manner similar to an installment sale by the lessor
and an installment purchase by the lessee. In other words, the lessor records a receivable and the
lessee records a liability for the several installment payments. For the lessee, this requires that the
leased asset and corresponding lease liability be valued at the present value of the lease payments.

6-3
BRIEF EXERCISES
Brief Exercise 6-1
Fran should choose the second investment opportunity. More rapid compounding
has the effect of increasing the actual rate, which is called the effective rate, at which
money grows per year. For the second opportunity, there are four, three-month
periods paying interest at 2% (one-quarter of the annual rate). $10,000 invested will
grow to $10,824 ($10,000 x 1.0824*). The effective annual interest rate, often referred
to as the annual yield, is 8.24% ($824 $10,000), compared to just 8% for the first
opportunity.
* Future value of $1: n=4, i=2% (from Table 1)
Brief Exercise 6-2

Bill will not have enough accumulated to take the trip. The future value of his
investment of $23,153 is $347 short of $23,500.
FV = $20,000 (1.15763* ) = $23,153
Brief Exercise 6-3

FV factor =
$26,600 = 1.33*
$20,000
* Future value of $1: n=3, i=? (from Table 1, i = approximately 10%)
Brief Exercise 6-4

John would be willing to invest no more than $12,673 in this opportunity.
PV = $16,000 (.79209* ) = $12,673
* Present value of $1: n=4, i=6% (from Table 2)

6-4
Brief Exercise 6-5

PV factor
= $13,200 = .825*
$16,000
* Present value of $1: n=4, i=? (from Table 2, i = approximately 5%)
Brief Exercise 6-6

Interest is paid for 12 periods at 1% (one-quarter of the annual rate).
FVA
= $500 (12.6825* )
= $6,341
* Future value of an ordinary annuity of $1: n=12, i=1% (from Table 3)
Brief Exercise 6-7

Interest is paid for 12 periods at 1% (one-quarter of the annual rate).
FVAD
= $500 (12.8093* )
= $6,405
* Future value of an annuity due of $1: n=12, i=1% (from Table 5)
Brief Exercise 6-8

PVA
= $10,000 (4.10020* )
= $41,000 approximately
* Present value of an ordinary annuity of $1: n=5, i=7% (from Table 4)

6-5
Brief Exercise 6-9

PVAD
= $10,000 (4.38721*)
= $43,872
* Present value of an annuity due of $1: n=5, i=7% (from Table 6)
Brief Exercise 6-10

PVA = $10,000
4.10020*
$41,002
PV
= $41,002
.87344*
$35,813
Or alternatively:
From Table 4,
PVA factor, n=7, i=7%
= PV factor for deferred annuity
PV
=
=
=
5.38929
1.80802
3.58127
= $10,000 x 3.58127 = $35,813 (rounded)
Brief Exercise 6-11

Annuity
$100,000
6.71008*
= $14,903 = Payment

6-6
Brief Exercise 6-12

PV = $6,000,0001 (12.40904* ) + 100,000,000 (.13137** )
PV = $74,454,240 + 13,137,000 = $87,591,240 = price of the bonds
1
$100,000,000 x 6% = $6,000,000
** Present value of $1: n=30, i=7% (from Table 2)
Brief Exercise 6-13

PVAD = $55,000 (7.24689* ) = $398,579 = Liability

6-7
EXERCISES
Exercise 6-1
1. FV = $15,000 (2.01220* ) = $30,183
2. FV = $20,000 (2.15892* ) = $43,178

3. FV = $30,000 (9.64629* ) = $289,389

4. FV = $50,000 (1.60103* ) = $80,052

Exercise 6-2
1. PV = $20,000 (.50835* ) = $10,167
2. PV = $14,000 (.39711* ) = $5,560

3. PV = $25,000 (.10367* ) = $2,592

4. PV = $40,000 (.46651* ) = $18,660

Exercise 6-3
First payment:
Second payment
Third payment
Fourth payment
Payment
$5,000
6,000
8,000
9,000
Total

6-8
x
x
x
x
PV of $1
i=8%
.92593
.85734
.73503
.63017
=
=
=
=
PV
$ 4,630
5,144
5,880
5,672
$21,326
n
1
2
4
6
Exercise 6-4
1. FV = $10,000 (2.65330* ) = $26,533
2. FV = $10,000 (1.80611* ) = $18,061

3. FV = $10,000 (1.81136* ) = $18,114

Exercise 6-5
1.
FVA
= $2,000 (4.7793* ) = $9,559
2.
FVAD = $2,000 (5.3528* ) = $10,706
3.
First deposit:
Second deposit
Third deposit
Fourth deposit
4.
Deposit
$2,000
2,000
2,000
2,000
Total
x
x
x
x
FV of $1
i=3%
1.60471
1.42576
1.26677
1.12551
=
=
=
=
FV
$ 3,209
2,852
2,534
2,251
$10,846
n
16
12
8
4
$2,000 x 4 = $8,000

6-9
Exercise 6-6
1.
PVA
= $5,000 (3.60478* )
= $18,024
2.
PVAD = $5,000 (4.03735* )
= $20,187
3.
Payment
$5,000
5,000
5,000
5,000
5,000
Total
First payment:
Second payment
Third payment
Fourth payment
Fifth payment
x
x
x
x
x
PV of $1
i = 3%
.88849
.78941
.70138
.62317
.55368
=
=
=
=
=
PV
$ 4,442
3,947
3,507
3,116
2,768
$17,780
n
4
8
12
16
20
Exercise 6-7
1.
PV = $40,000 (.62092* ) = $24,837
2.
$36,289
$65,000
.55829*
3.
$15,884
$40,000
.3971*
* Present value of $1: n=?, i=8% (from Table 2, n = approximately 12 years)
4.
$46,651 =
$100,000
.46651*
5.
FV = $15,376 (3.86968* ) = $59,500

6-10
Exercise 6-8
1.
PVA = $3,000 (3.99271* ) = $11,978
2.
$242,980 =
$75,000
3.2397*
* Present value of an ordinary annuity of $1: n=4, i=? (from Table 4, i =

approximately 9%)
3.
$161,214 =
$20,000
8.0607*
* Present value of an ordinary annuity of $1: n=?, i= 9% (from Table 4, n =

approximately 15 years)
4.
$500,000 =
$80,518
6.20979*

approximately 6%)
5.
$250,000 =
3.16987*
$78,868
Exercise 6-9
Requirement 1
PV = $100,000 (.68058* ) = $68,058

Requirement 2
Annuity amount = $100,000
5.8666*
Annuity amount
= $17,046
Requirement 3
6.3359*

6-11
Exercise 6-10
1. Choose the option with the highest present value.
(1) PV = $64,000
(2) PV = $20,000 + $8,000 (4.91732* )
PV = $20,000 + $39,339 = $59,339

(3) PV = $13,000 (4.91732* ) = $63,925
Alex should choose option (1).
2. FVA = $100,000 (13.8164* ) = $1,381,640

Exercise 6-11
PV = $85,000 (.82645* ) = $70,248 = Note/revenue

6-12
Exercise 6-12
Annuity = $20,000 5,000 = $670 = Payment
22.39646*
Exercise 6-13
PVA factor = $100,000 = 7.46938*
$13,388
approximately 12%)
Exercise 6-14
Annuity =
$12,000 = $734 = Payment
16.35143*
5 years x 4 quarters = 20 periods
8% 4 quarters = 2%
Exercise 6-15
PV = $12,000,0001 (17.15909* ) + 300,000,000 (.14205** )
PV = $205,909,080 + 42,615,000 = $248,524,080 = price of the bonds
1
$300,000,000 x 4 % = $12,000,000

6-13
Exercise 6-16
PVA = $5,000
4.35526*
$21,776
PV
= $21,776
.82645*
$17,997
Or alternatively:
From Table 4,
PV
=
=
=
5.33493
1.73554
3.59939
= $5,000 x 3.59939 = $17,997
Exercise 6-17
PV
PV
$1,200 =
.90573*
.90573*
1,200
$1,325
PVA =
14.99203*
$1,325
annuity amount
PVA =
$1,325
=
*
14.99203
$88
Payment
Exercise 6-18
Requirement 1
PVA = $400,000 (10.59401* ) = $4,237,604 = Liability
Requirement 2
PVAD = $400,000 (11.33560* ) = $4,534,240 = Liability
6-14
Exercise 6-19
List A
e
1. Interest
2. Monetary asset
3. Compound interest
i
k
4. Simple interest
5. Annuity
6. Present value of a single

amount
7. Annuity due
c
d
a
8. Future value of a single

amount
9. Ordinary annuity
10. Effective rate or yield
h
g
11. Nonmonetary asset

12. Time value of money
13. Monetary liability
List B
a. First cash flow occurs one period after agreement
begins.
b. The rate at which money will actually grow during a
year.
c. First cash flow occurs on the first day of the
agreement.
d. The amount of money that a dollar will grow to.
e. Amount of money paid/received in excess of amount
borrowed/lent.
f. Obligation to pay a sum of cash, the amount of
which is fixed.
g. Money can be invested today and grow to a larger
amount.
h. No fixed dollar amount attached.
i. Computed by multiplying an invested amount by the
interest rate.
j. Interest calculated on invested amount plus
accumulated interest.
k. A series of equal-sized cash flows.
l. Amount of money required today that is equivalent to
a given future amount.
m. Claim to receive a fixed amount of money.

6-15
Exercise 6-20
1. a. An annuity is a series of cash flows or other economic benefits occurring at
fixed intervals, ordinarily as a result of an investment. Present value is the
value at a specified time of an amount or amounts to be paid or received later,
discounted at some interest rate. In an annuity due, the payments occur at the
beginning, rather than at the end, of the periods. Thus, the present value of an
annuity due includes the initial payment at its undiscounted amount. This lease
should be evaluated using the present value of an annuity due.
2. d. Both future value tables will be used because the $75,000 already in the account
will be multiplied times the future value factor of 1.26 to determine the amount
3 years hence, or $94,500. The three payments of $4,000 represent an ordinary
annuity. Multiplying the three-period annuity factor (3.25) by the payment
amount ($4,000) results in a future value of the annuity of $13,000. Adding the
two elements together produces a total account balance of $107,500.

6-16
PROBLEMS
Problem 6-1
Choose the option with the lowest present value of cash outflows, net of the
present value of any cash inflows (Cash outflows are shown as negative amounts; cash
inflows as positive amounts).
Machine A:
PV = $48,000 1,000 (6.71008* ) + 5,000 (.46319** )
PV = $48,000 6,710 + 2,316

PV = $52,394
Machine B:
PV = $40,000 4,000 (.79383) 5,000 (.63017) 6,000 (.54027)
PV of $1: i=8%
(from Table 2)
n=3
n=6
n=8
PV = - $40,000 - 3,175 - 3,151 - 3,242

PV = - $49,568
Esquire should purchase machine B.
Problem 6-2
1. PV = $10,000 + 8,000 (3.79079* ) = $40,326 = Equipment
2. $400,000 = Annuity amount x 5.9753*


5.9753
Annuity amount = $66,942 = Required annual deposit
3. PVAD = $120,000 (9.36492* ) = $1,123,790 = Lease liability


6-17
Problem 6-3
Choose the option with the lowest present value of cash payments.
1. PV = $1,000,000
2. PV = $420,000 + 80,000 (6.71008* ) = $956,806
3. PV = PVAD = $135,000 (7.24689* ) = $978,330

4. PV = $1,500,000 (.68058* ) = $1,020,870

Harding should choose option 2.
Problem 6-4
The restaurant should be purchased if the present value of the future cash
flows discounted at 10% rate is greater than $800,000.
PV = $80,000 (4.35526* ) + 70,000 (.51316** ) + 60,000 (.46651**)
n=8
n=7
+ $50,000 (.42410**) + 40,000 (.38554**) + 700,000 (.38554**)

n=9
n=10
n=10

** Present value of $1:, i=10% (from Table 2)
PV = $718,838 < $800,000
Since the PV is less than $800,000, the restaurant should not be purchased.

6-18
Problem 6-5
The maximum amount that should be paid for the store is the present value of the
estimated cash flows.
Years 1-5:
PVA = $70,000
3.99271* =
$279,490
Years 6-10:
PVA = $70,000
3.79079* =
$265,355
PV
= $265,355
.68058*
$180,595
$395,515
Years 11-20:
PVA = $70,000
5.65022*
PV
= $395,515
.62092*
$245,583
$167,139
PV
= $245,583
.68058*
End of Year 20:

PV
= $400,000
.32197* x .62092 x .68058 =
$54,424
Total PV = $279,490 + 180,595 + 167,139 + 54,424 =
$681,648
The maximum purchase price is $681,648.

6-19
Problem 6-6
1.
PV of $1 factor = $30,000 = .5000*
$60,000
* Present value of $1: n=? , i=8% (from Table 2, n = approximately 9 years)
2.
Annuity factor =
PVA
Annuity amount
Annuity factor = $28,700 = 4.1000*

$7,000
* Present value of an ordinary annuity of $1: n= 5, i=? (from Table 4, i =
approximately 7%)
3.
PVA
Annuity amount = Annuity factor
Annuity amount = $10,000 =
6.41766*
$1,558
Payment

6-20
Problem 6-7
Requirement 1
PVA
Annuity amount = $250,000 = $78,868 = Payment
3.16987*
Requirement 2
PVA
Annuity amount = $250,000 = $62,614 = Payment
3.99271*
Requirement 3
PVA
Annuity factor = Annuity amount
Annuity factor = $250,000 = 4.86845*
$51,351
* Present value of an ordinary annuity of $1: n=? , i= 10% (from Table 4, n = approximately 7
payments)
Requirement 4
PVA
Annuity factor = Annuity amount
Annuity factor = $250,000 = 2.40184*
$104,087
* Present value of an ordinary annuity of $1: n= 3, i= ? (from Table 4, i = approximately
12%)

6-21
Problem 6-8
Requirement 1
Present value of payments 4-6:
PVA = $40,000
2.48685*
$99,474
* Present value of an ordinary annuity of $1: n= 3, i= 10% (from Table 4)
PV
= $99,474
.75131*
$74,736
* Present value $1: n= 3, i= 10% (from Table 2)
Present value of all payments:

$ 62,171 (PV of payments 1-3: $25,000
74,736
$136,907
2.48685* )
(PV of payments 4-6 calculated above)
The note payable and corresponding building should be recorded at $136,907.

Or alternatively:
PV = $25,000 (2.48685* ) + 40,000 (1.86841** ) = $136,907

From Table 4,
PVA factor, n=3 i=10%
= 4.35526
= 2.48685
= 1.86841**
Requirement 2
$136,907 x 10% = $13,691 = Interest in the year 2006

6-22
Problem 6-9
Choose the alternative with the highest present value.
Alternative 1:
PV = $180,000
Alternative 2:
PV = PVAD = $16,000 (11.33560* ) = $181,370
Alternative 3:
PVA = $50,000
7.02358*
$351,179
PV
= $351,179
.54393*
$191,017
John should choose alternative 3.

Or, alternatively (for 3):
PV = $50,000 (3.82037* )
$191,019
(difference due to rounding)
From Table 4,
= 10.33560
= 6.51523
= 3.82037*
or, From Table 6,

PVAD factor, n=20, i=7%
= 11.33560
= 7.51523
= 3.82037*
6-23
Problem 6-10
PV = $20,000 (3.79079* ) + 100,000 (.62092** ) = $137,908
The note payable and corresponding merchandise should be recorded at $137,908.

6-24
Problem 6-11
Requirement 1
PVAD = Annuity amount x Annuity factor
Annuity amount =
PVAD
Annuity factor

7.24689*
Annuity amount = $110,392 = Lease payment

Requirement 2
6.71008*

Requirement 3
PVAD = (Annuity amount x Annuity factor) + PV of residual
Annuity amount =
PVAD PV of residual
Annuity factor
PV of residual = $50,000
.46319*
$23,160
Annuity amount = $800,000 23,160

7.24689*

6-25
Problem 6-12
Requirement 1
PVA = Annuity amount x Annuity factor
Annuity amount =
PVA
Annuity factor

7.36009*

Requirement 2
15.32380*

Requirement 3
44.9550*
* Present value of an ordinary annuity of $1: n=60, i=1% (given)

6-26
Problem 6-13
Choose the option with the lowest present value of cash outflows, net of the
present value of any cash inflows. (Cash outflows are shown as negative amounts;
cash inflows as positive amounts)
1. Buy option:
PV = - $160,000 - 5,000 (5.65022* ) + 10,000 (.32197** )
PV = - $160,000 - 28,251 + 3,220

PV = - $185,031
2. Lease option:
PVAD = - $25,000 (6.32825* ) = - $158,206
Kiddy Toy should lease the machine.

6-27
Problem 6-14
Requirement 1
Tinkers:
PVA = $20,000
7.19087*
$143,817
PV
= $143,817
.81162*
$116,725
$179,772
Evers:
PVA = $25,000
7.19087*
PV
= $179,772
.73119*
$131,447
$215,726
Chance:
PVA = $30,000
7.19087*
PV
= $215,726
.65873*
$142,105
Or, alternatively:
Deferred annuity factors:
Employee
Tinkers
Evers
Chance
PVA factor, i=11%

7.54879 (n=17)
7.70162 (n=18)
7.83929 (n=19)

6-28
- PVA factor, i=11%

1.71252 (n=2)
2.44371 (n=3)
3.10245 (n=4)
=
=
=
=
Deferred annuity
factor
5.83627
5.25791
4.73684
Problem 6-14 (concluded)

Present value of pension obligations:
Tinkers: $20,000 x 5.83627 = $116,725
Evers: $25,000 x 5.25791 = $131,448*
Chance: $30,000 x 4.73684 = $142,105
*rounding difference
Requirement 2
Present value of pension obligations as of December 31, 2009:
Employee
PV as of 12/31/06
Tinkers
Evers
Chance
$116,725
131,448
142,105
FV of $1 factor,
n=3, i=11%
x
1.36763
x
1.36763
x
1.36763
Total present value
PV as of 12/31/09
=
=
=
$159,637
179,772
194,347
$533,756
Amount of annual contribution:

FVAD = Annuity amount x Annuity factor
Annuity amount =
FVAD
Annuity factor
Annuity amount = $533,756 =

3.7097*
$143,881

6-29
CASES
Analysis Case 6-1
The settlement was determined by calculating the present value of lost future
income ($200,000 per year)1 discounted at a rate which is expected to approximate the
time value of money. In this case, the discount rate, i, apparently is 7% and the
number of periods, n, is 25 (the number of years to Johns retirement). Johns
settlement was calculated as follows:
$200,000
annuity
amount
11.65358*
$2,330,716

Note: In the actual case, Johns present salary was increased by 3% per year to reflect future salary
increases.
1In the actual case, Johns present salary was increased by 3% per year to reflect future salary increases.

6-30
Analysis Case 6-2

Sally should choose the alternative with the highest present value.
Alternative 1:
PV = $50,000
Alternative 2:
PV = PVAD = $10,000 (5.21236* ) = $52,124
Alternative 3:
PVA
= $22,000
2.67301*
$58,806
PV
$58,806
.89000*
$52,337
Sally should choose alternative 3.

Or, alternatively (for 3):
PV = $22,000 (2.37897* )
= $52,337
From Table 4,
=
=
=
4.21236
1.83339
2.37897*
=
=
=
5.21236
2.83339
2.37897*
or, From Table 6,


6-31
Communication Case 6-3

Suggested Grading Concepts and Grading Scheme:
Content (65%)
______ 25 Explanation of the method used (present value) to
compare the two contracts.
______
30 Presentation of the calculations.

49ers PV = $6,989,065
Cowboys PV = $6,492,710
______
10 Correct conclusion.
____
______ 65 points
Writing (35%)
______ 5 Proper letter format.
______
Terminology and tone appropriate to the audience of

a player's agent.
______
12 Organization permits ease of understanding.

_____ Introduction that states purpose.
_____ Paragraphs that separate main points.
______
12 English
_____ Sentences grammatically clear and well organized,
concise.
_____ Word selection.
_____ Spelling.
_____ Grammar and punctuation.
____
______ 35 points

6-32
Ethics Case 6-4

The ethical issue is that the 21% return implies an annual return of 21% on an
investment and misrepresents the funds performance to all current and future
stakeholders. Interest rates are usually assumed to represent an annual rate, unless
otherwise stated. Interested investors may assume that the return for $100 would be
$21 per year, not $21 over two years. The Damon Investment Company ad should
explain that the 21% rate represented appreciation over two years.
Judgment Case 6-5

Purchase price of new machine
Sales price of old machine
Incremental cash outflow required
$150,000
(100,000)
$ 50,000
The new machine should be purchased if the present value of the savings in
operating costs of $8,000 ($18,000 - 10,000) plus the present value of the salvage
value of the new machine exceeds $50,000.
PV = ($8,000 x 3.99271* ) + ($25,000 x .68058** )
PV = $31,942 + 17,015
PV = $48,957
The new machine should not be purchased.

6-33
Real World Case 6-6

Requirement 1
The effective interest rate can be determined by solving for the unknown present
value of $1 factor (40 semiannual periods):
PV of $1 factor = $751.8 = .45289*
$1,660
* Present value of $1: n= 40, i= ? (from Table 2, i = 2%)
The effective, semiannual interest rate is 2%

We could also solve for the annual rate using the increase in the carrying value of
the bonds:
Balance, 2004
Less: Balance 2003
Accretion (interest expense)
$608,092
(584,473)
$23, 619
$23,619 $584,472 = approximately 4% annual rate.

Requirement 2
Using a 2% effective semiannual rate and 40 periods:
PV = $1,000 (.45289* ) = $452.89
The issue price of one, $1,000 maturity value bond was $452.89.

6-34
Analysis Case 6-7

Requirement 1
The following liabilities are valued using the time value of money concept:
Long-term debt (Note 6)
Leases (Note 7)
Pension and postretirement benefit plans (Note 12)
Requirement 2
Disclosure Note 12: Employee Benefit Plans, indicates that the weighted-average
discount rate used in determining the present value of pension obligations in 2004 was
6.78%.

6-35

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Time Value of Money Concepts

QUESTIONS FOR REVIEW OF KEY TOPICS

Solutions Manual, Vol.1, Chapter 6

The McGraw-Hill Companies, Inc., 2007

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Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2007

Intermediate Accounting, 4/e

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Answers to Questions (concluded)

Solutions Manual, Vol.1, Chapter 6

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Brief Exercise 6-2

Brief Exercise 6-3

* Future value of $1: n=3, i=? (from Table 1, i = approximately 10%)

Brief Exercise 6-4

The McGraw-Hill Companies, Inc., 2007

Intermediate Accounting, 4/e

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Brief Exercise 6-5

* Present value of $1: n=4, i=? (from Table 2, i = approximately 5%)

Brief Exercise 6-6

* Future value of an ordinary annuity of $1: n=12, i=1% (from Table 3)

Brief Exercise 6-7

* Future value of an annuity due of $1: n=12, i=1% (from Table 5)

Brief Exercise 6-8

* Present value of an ordinary annuity of $1: n=5, i=7% (from Table 4)

Solutions Manual, Vol.1, Chapter 6

The McGraw-Hill Companies, Inc., 2007

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Brief Exercise 6-9

* Present value of an annuity due of $1: n=5, i=7% (from Table 6)

Brief Exercise 6-10

* Present value of an ordinary annuity of $1: n=5, i=7% (from Table 4)

* Present value of $1: n=2, i=7% (from Table 2)

= $10,000 x 3.58127 = $35,813 (rounded)

Brief Exercise 6-11

* Present value of an ordinary annuity of $1: n=10, i=8% (from Table 4)

The McGraw-Hill Companies, Inc., 2007

Intermediate Accounting, 4/e

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Brief Exercise 6-12

Brief Exercise 6-13

Solutions Manual, Vol.1, Chapter 6

The McGraw-Hill Companies, Inc., 2007

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2. FV = $20,000 (2.15892* ) = $43,178

3. FV = $30,000 (9.64629* ) = $289,389

4. FV = $50,000 (1.60103* ) = $80,052

2. PV = $14,000 (.39711* ) = $5,560

3. PV = $25,000 (.10367* ) = $2,592

4. PV = $40,000 (.46651* ) = $18,660

The McGraw-Hill Companies, Inc., 2007

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2. FV = $10,000 (1.80611* ) = $18,061

3. FV = $10,000 (1.81136* ) = $18,114

= $2,000 (4.7793* ) = $9,559

* Future value of an ordinary annuity of $1: n=4, i=12% (from Table 3)

FVAD = $2,000 (5.3528* ) = $10,706

* Future value of an annuity due of $1: n=4, i=12% (from Table 5)

+ $50,000 (.42410) + 40,000 (.38554) + 700,000 (.38554**)