Accounting Chapter 6

Notes that do not include a stated interest rate, but still includes interest

non-interest bearing notes

Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose?

$1,000,000 x 0.001 = $1,000 they are indifferent

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

$5000 * 1.71382 = 8,570 - 5000 = 3570

Compute the present value of $10,000 received at the beginning of each of the next four years with interest at 6% compounded annually.

10,000 * 3.67301(found through PVAD table)=36,730

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 15 years and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?

1000 * 23.2760 = 23,275

Lou Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:

10000/6.41766 = 1,558-(1000*.09) = 658

Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12thyear (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

12000*6.14457=73734 73734*.82645 = 60,909.

Assume you plan to buy a new car in 5 years and you think it will cost $20,000 at that time. What amount must you invest today in order to accumulate $20,000 in 5 years, if you can earn 8% interest compounded annually?

20,000*.68058 (from table 2 with i=.08, n=5) = $13,611.60

Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate.

2000*5.88923 = 11778 3500*5.88923 = 20,612.305 20,612.305*.35218 = 7259.24 7259.24 + 11778 = 19037.24

Joe Nautilus has $210,000 and wants to retire. What return must his money earn so he may receive annual benefits of $30,000 for the next 10 years.

210,000/30000 = 7%

Samuel Johnson invested in gold U.S. coins ten years ago, paying $216.53 for one-ounce gold "double eagle" coins. He could sell these coins for $734 today. What was his annual rate of return for this investment?

216.53/734 = .295 n 10 i = 13% (look for .295 on the PV table)

Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

3000/3.2464=924 dollars

A series of equal periodic payments

Annuity

Annuity payments at the beginning of the period

Annuity Due

On January 1, 2013, Todd Furniture Company hired a new sales manager for the new showroom. The sales manager is expected to work 30 years before retirement on December 31, 2042. Annual retirement benefits will be paid at the end of each year of retirement, a period that is expected to be 25 years. The sales manager will earn $2,500 in annual retirement benefits for the first year worked, 2013. How much must Todd Furniture contribute to the company pension fund in 2013 to provide for $2,500 in annual pension benefits for 25 years that are expected to begin in 30 years? Todd Furniture's pension fund is expected to earn 5% interest.

Annuity amount * PVA = PVA2500 * PV = PV of amount 2500 * 14.09394 = 35234.85*.23138=$8152.64

First cash flow is expected to occur more than one period after the date of the agreement

Deferred annuity

The value of the bond is equal to the sum of the present value of all future payments

Duh.

Expected cash flow approach

Expected value of cash flows * Present value factor (found through i and n) = Present Value

Equation for future value

FV = PV * (1+i)^n i=interest rate, n=compounding periods

To save for her newborn son's college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12 percent. What is the future value?

FVA = A xFVIFA (App. C: 12%, 18 + 1 = 19 periods) = $1,000 x (63.440 - 1) = $62,440

What is compounding interest?

Includes interest not only on the initial investment, but also the accumulated interest in previous periods

Equation for simple interest

Interest = P(Face amount) x i(interest rate) x n(years)

Finding the future value of an ordinary annuity?

Multiply the amount of the annuity by the future value of an ordinary annuity factor(FVA)

Annuity payments at the end of the period

Ordinary annuity

Assume that you borrow $700 from a friend and intend to repay the amount in four equal annual installments beginning one year from today. Your friend wishes to be reimbursed for the time value of money at an 8% annual rate.

PV 700/PVA 3.31213 = 211.34

Equation for present value

PV = FV/(1+i)^n