CHAPTER 6

ACCOUNTING AND THE TIME VALUE OF

MONEY
MULTIPLE CHOICEConceptual
Anse! No" Desc!#pt#on
d 1. Definition of present value.
c 2. Understanding compound interest tables.
a 3. Identification of correct compound interest table.
d 4. Identification of correct compound interest table.
c 5. Identification of correct compound interest table.
c 6. Identification of correct compound interest table.
b 7. Identification of correct compound interest table.
d 8. Identification of number of compounding periods.
a . !d"ust t#e interest rate for time periods.
c 1$. Identification of present value of 1 table.
c 11. Determine present value of an ordinar% annuit%.
b 12. Identification of a future value of an ordinar% annuit% of 1.
a 13. !ppropriate use of an annuit% due table.
c 14. Determine t#e timing of rents of an annuit% due.
b 15. &resent value of an ordinar% annuit% and an annuit% due.
b 16. 'actors of an ordinar% annuit% and an annuit% due.
b 17. Difference bet(een an ordinar% annuit% and an annuit% due.
d 18. Definition of deferred annuities.
MULTIPLE CHOICECo$putat#onal
Anse! No" Desc!#pt#on
c 1. )alculate present value of a future amount.
b 2$. )alculate a future value.
a 21. )alculate a future value of an annuit% due.
b 22. )alculate a future value.
c 23. )alculate a future value.
c 24. )alculate present value of a future amount.
d 25. )alculate present value of a future amount.
a 26. )alculate present value of an annuit% due.
d 27. Interest compounded *uarterl%.
d 28. )alculate t#e future value of 1.
a 2. )alculate future value of an annuit% due.
a 3$. )alculate present value of an ordinar% annuit%.
b 31. )alculate present value of an annuit% due.
a 32. )alculate future value of an ordinar% annuit%.
d 33. )alculate future value of an annuit% due.
c 34. )alculate annual deposit for annuit% due.
MULTIPLE CHOICECo$putat#onal +cont.,
Anse! No" Desc!#pt#on
d 35. )alculate cost of mac#ine purc#ased on installment.
b 36. )alculate cost of mac#ine purc#ased on installment.
c 37. )alculate cost of mac#ine purc#ased on installment.
a 38. )alculate t#e annual rents of leased e*uipment.
b 3. )alculate present value of an investment in e*uipment.
b 4$. )alculate proceeds from issuance of bonds.
b 41. )alculate proceeds from issuance of bonds.
MULTIPLE CHOICECPA A%apte%
Anse! No" Desc!#pt#on
d 42. Identification of correct compound interest table.
a 43. !ppropriate use of an ordinar% annuit% table.
b 44. )alculate annual deposit of annuit% due.
a 45. )alculate t#e present value of a note.
a 46. )alculate t#e present value of a note.
c 47. )alculate interest revenue of a noninterest-bearing note.
d 48. Determine t#e issue price of a bond.
c 4. )alculate interest e.pense of bonds.
b 5$. Determine t#e ac*uisition cost of a franc#ise.
E&ERCI'E'
Ite$ Desc!#pt#on
/6-51 &resent and future value concepts.
/6-52 &resent value of an annuit% due.
/6-53 'uture value of an annuit% due.
/6-54 )ompute good(ill.
/6-55 )ompute t#e annual rent.
/6-56 &resent value of an investment in e*uipment.
/6-57 )alculate t#e mar0et price of a bond.
/6-58 )alculate t#e mar0et price of a bond.
PRO(LEM'
Ite$ Desc!#pt#on
&6-5 &resent value and future value computations.
&6-6$ &resent value of ordinar% annuit% and annuit% due.
&6-61 !nnuit% (it# c#ange in interest rate.
&6-62 'inding t#e implied interest rate.
&6-63 )alculation of un0no(n rent and interest.
&6-64 Deferred annuit%.
CHAPTER LEARNING O()ECTIVE'
1. Identif% accounting topics (#ere time value of mone% is relevant.
2. Distinguis# bet(een simple and compound interest.
3. 1earn #o( to use appropriate compound interest tables.
4. Identif% variables fundamental to solving interest problems.
5. 2olve future and present value of 1 problems.
6. 2olve future value of ordinar% and annuit% due problems.
7. 2olve present value of ordinar% and annuit% due problems.
'UMMARY OF LEARNING O()ECTIVE' (Y *UE'TION'
L"O" + L"O" , L"O" - L"O" .
L"O" / No" T0pe No" T0pe No" T0pe No"
T0pe No" T0pe
13. 3) 4. 3) 2. 3) 8. 3) 1.
3)
3. 3) . 3) 1.
3)
4. 3) 2$.
3)
5. 3) 22.
3)
6. 3) 23.
3)
7. 3) 24.
3)
1$. 3) 25.
3)
27. 3) 28.
3)
42. 3) 47.
3)
48.
3)
51.
/
54.
/
56.
/
5.
&
L"O" 6 L"O" 1 L"O" 1 +cont.,
No" T0pe No " T0pe No " T0pe
14. 3) 11. 3) 41. 3)
16. 3) 12. 3) 43. 3)
21. 3) 15. 3) 44. 3)
2. 3) 16. 3) 45. 3)
32. 3) 17. 3) 46. 3)
33. 3) 18. 3) 5$. 3)
53. / 26. 3) 52. /
61. & 3$. 3) 55. /
31. 3) 57. /
34. 3) 58. / 4ote5 3) 6
3ultiple )#oice
35. 3) 5. & / 6 /.ercise
36. 3) 6$. & & 6 &roblem
37. 3) 62. &
38. 3) 63. &
3. 3) 64. &
4$. 3)
MULTIPLE CHOICEConceptual
1. &resent value is
a. t#e value no( of a future amount.
b. t#e amount t#at must be invested no( to produce a 0no(n future value.
c. al(a%s smaller t#an t#e future value.
d. all of t#ese.
2. 7#ic# of t#e follo(ing tables (ould s#o( t#e largest value for an interest rate of
58 for si. periods9
a. 'uture value of 1
b. &resent value of 1
c. 'uture value of an ordinar% annuit% of 1
d. &resent value of an ordinar% annuit% of 1
3. 7#ic# table (ould %ou use to determine #o( muc# %ou (ould need to #ave
deposited t#ree %ears ago at 1$8 compounded annuall% in order to #ave :1;$$$
toda%9
a. 'uture value of 1 or present value of 1
b. 'uture value of an annuit% due of 1
c. 'uture value of an ordinar% annuit% of 1
d. &resent value of an ordinar% annuit% of 1
4. 7#ic# table (ould %ou use to determine #o( muc# must be deposited no( in
order to provide for 5 annual (it#dra(als at t#e beginning of eac# %ear; starting
one %ear #ence9
a. 'uture value of an ordinar% annuit% of 1
b. 'uture value of an annuit% due of 1
c. &resent value of an annuit% due of 1
d. 4one of t#ese
5. 7#ic# table #as a factor of 1.$$$$$ for 1 period at ever% interest rate9
a. 'uture value of 1
b. &resent value of 1
c. 'uture value of an ordinar% annuit% of 1
d. &resent value of an ordinar% annuit% of 1
6. 7#ic# table (ould s#o( t#e largest factor for an interest rate of 88 for five
periods9
a. 'uture value of an ordinar% annuit% of 1
b. &resent value of an ordinar% annuit% of 1
c. 'uture value of an annuit% due of 1
d. &resent value of an annuit% due of 1
7. 7#ic# of t#e follo(ing tables (ould s#o( t#e smallest factor for an interest rate
of 1$8 for si. periods9
a. 'uture value of an ordinar% annuit% of 1
b. &resent value of an ordinar% annuit% of 1
c. 'uture value of an annuit% due of 1
d. &resent value of an annuit% due of 1
8. An amount is deposited for eight years at 8%. If compounding occurs quarterly,
then the table value is found at
a. 88 for eig#t periods.
b. 28 for eig#t periods.
c. 88 for 32 periods.
d. 28 for 32 periods.
. If t#e number of periods is 0no(n; t#e interest rate is determined b%
a. dividing t#e future value b% t#e present value and loo0ing for t#e *uotient in
t#e future value of 1 table.
b. dividing t#e future value b% t#e present value and loo0ing for t#e *uotient in
t#e present value of 1 table.
c. dividing t#e present value b% t#e future value and loo0ing for t#e *uotient in
t#e future value of 1 table.
d. multipl%ing t#e present value b% t#e future value and loo0ing for t#e product
in t#e present value of 1 table.
1$. <#e figure .4232 is ta0en from t#e column mar0ed 28 and t#e ro( mar0ed t#ree
periods in a certain interest table. 'rom (#at interest table is t#is figure ta0en9
a. 'uture value of 1
b. 'uture value of annuit% of 1
c. &resent value of 1
d. &resent value of annuit% of 1
11. /d 2loan (ants to (it#dra( :25;$$$ +including principal, from an investment
fund at t#e end of eac# %ear for five %ears. =o( s#ould #e compute #is re*uired
initial investment at t#e beginning of t#e first %ear if t#e fund earns 1$8
compounded annuall%9
a. :25;$$$ times t#e future value of a 5-%ear; 1$8 ordinar% annuit% of 1.
b. :25;$$$ divided b% t#e future value of a 5-%ear; 1$8 ordinar% annuit% of 1.
c. :25;$$$ times t#e present value of a 5-%ear; 1$8 ordinar% annuit% of 1.
d. :25;$$$ divided b% t#e present value of a 5-%ear; 1$8 ordinar% annuit% of 1.
12. !nn >ut# (ants to invest a certain sum of mone% at t#e end of eac# %ear for five
%ears. <#e investment (ill earn 68 compounded annuall%. !t t#e end of five
%ears; s#e (ill need a total of :5$;$$$ accumulated. =o( s#ould s#e compute #er
re*uired annual investment9
a. :5$;$$$ times t#e future value of a 5-%ear; 68 ordinar% annuit% of 1.
b. :5$;$$$ divided b% t#e future value of a 5-%ear; 68 ordinar% annuit% of 1.
c. :5$;$$$ times t#e present value of a 5-%ear; 68 ordinar% annuit% of 1.
d. :5$;$$$ divided b% t#e present value of a 5-%ear; 68 ordinar% annuit% of 1.
13. 7#ic# of t#e follo(ing transactions (ould re*uire t#e use of t#e present value of
an annuity due concept in order to calculate t#e present value of t#e asset obtained
or liabilit% o(ed at t#e date of incurrence9
a. ! capital lease is entered into (it# t#e initial lease pa%ment due upon t#e
signing of t#e lease agreement.
b. ! capital lease is entered into (it# t#e initial lease pa%ment due one mont#
subse*uent to t#e signing of t#e lease agreement.
c. ! ten-%ear 88 bond is issued on ?anuar% 2 (it# interest pa%able semiannuall%
on ?ul% 1 and ?anuar% 1 %ielding 78.
d. ! ten-%ear 88 bond is issued on ?anuar% 2 (it# interest pa%able semiannuall%
on ?ul% 1 and ?anuar% 1 %ielding 8.
14. 7#ic# of t#e follo(ing is true9
a. >ents occur at t#e beginning of eac# period of an ordinar% annuit%.
b. >ents occur at t#e end of eac# period of an annuit% due.
c. >ents occur at t#e beginning of eac# period of an annuit% due.
d. 4one of t#ese.
15. !n accountant (is#es to find t#e present value of an annuit% of :1 pa%able at t#e
beginning of eac# period at 1$8 for eig#t periods. <#e accountant #as onl% one
present value table (#ic# s#o(s t#e present value of an annuit% of :1 pa%able at
t#e end of eac# period. <o compute t#e present value; t#e accountant (ould use
t#e present value factor in t#e 1$8 column for
a. seven periods.
b. eig#t periods and multipl% b% +1 @ .1$,.
c. eig#t periods.
d. nine periods and multipl% b% +1 A .1$,.
16. 7#ic# statement is false?
a. <#e factor for t#e future value of an annuit% due is found b% multipl%ing t#e
ordinar% annuit% table value b% one plus t#e interest rate.
b. <#e factor for t#e present value of an annuit% due is found b% multipl%ing t#e
ordinar% annuit% table value b% one minus t#e interest rate.
c. <#e factor for t#e future value of an annuit% due is found b% subtracting
1.$$$$$ from t#e ordinar% annuit% table value for one more period.
d. <#e factor for t#e present value of an annuit% due is found b% adding 1.$$$$$
to t#e ordinar% annuit% table value for one less period.
17. If an annuit% due and an ordinar% annuit% #ave t#e same number of e*ual
pa%ments and t#e same interest rates; t#en
a. t#e present value of t#e annuit% due is less t#an t#e present value of t#e
ordinar% annuit%.
b. t#e present value of t#e annuit% due is greater t#an t#e present value of t#e
ordinar% annuit%.
c. t#e future value of t#e annuit% due is e*ual to t#e future value of t#e ordinar%
annuit%.
d. t#e future value of t#e annuit% due is less t#an t#e future value of t#e ordinar%
annuit%.
18. 7#ic# of t#e follo(ing is false?
a. <#e future value of a deferred annuit% is t#e same as t#e future value of an
annuit% not deferred.
b. ! deferred annuit% is an annuit% in (#ic# t#e rents begin after a specified
number of periods.
c. <o compute t#e present value of a deferred annuit%; (e compute t#e present
value of an ordinar% annuit% of 1 for t#e entire period and subtract t#e present
value of t#e rents (#ic# (ere not received during t#e deferral period.
d. If t#e first rent is received at t#e end of t#e si.t# period; it means t#e ordinar%
annuit% is deferred for si. periods.
Mult#ple C2o#ce Anse!sConceptual
1. d 4. d 7. b 1$. c 13. a 16. b
2. c 5. c 8. d 11. c 14. c 17. b
3. a 6. c . a 12. b 15. b 18. d
2olution to 3ultiple )#oice *uestion for (#ic# t#e ans(er is Bnone of t#ese.C
4. &resent value of an Drdinar% !nnuit% of 1.
MULTIPLE CHOICECo$putat#onal
Items 1 t#roug# 22 appl% to t#e appropriate use of interest tables. Eiven belo( are t#e
future value factors for 1 at 88 for one to five periods. /ac# of t#e items 1 to 22 is
based on 88 interest compounded annuall%.
&eriods 'uture Falue of 1 at 88
1 1.$8$
2 1.166
3 1.26$
4 1.36$
5 1.46
1. 7#at amount s#ould be deposited in a ban0 account toda% to gro( to :1$;$$$
t#ree %ears from toda%9
a. :1$;$$$ G 1.26$
b. :1$;$$$ G 1.26$ G 3
c. :1$;$$$ H 1.26$
d. :1$;$$$ H 1.$8$ G 3
2$. If :5;$$$ is put in a savings account toda%; (#at amount (ill be available t#ree
%ears from toda%9
a. :5;$$$ H 1.26$
b. :5;$$$ G 1.26$
c. :5;$$$ G 1.$8$ G 3
d. +:5;$$$ G 1.$8$, @ +:5;$$$ G 1.166, @ +:5;$$$ G 1.26$,
21. 7#at amount (ill be in a ban0 account t#ree %ears from no( if :8;$$$ is invested
eac# %ear for four %ears (it# t#e first investment to be made toda%9
a. +:8;$$$ G 1.26$, @ +:8;$$$ G 1.166, @ +:8;$$$ G 1.$8$, @ :8;$$$
b. :8;$$$ G 1.36$ G 4
c. +:8;$$$ G 1.$8$, @ +:8;$$$ G 1.166, @ +:8;$$$ G 1.26$, @ +:8;$$$ G 1.36$,
d. :8;$$$ G 1.$8$ G 4
22. If :6;$$$ is put in a savings account toda%; (#at amount (ill be available si.
%ears from no(9
a. :6;$$$ G 1.$8$ G 6
b. :6;$$$ G 1.$8$ G 1.46
c. :6;$$$ G 1.166 G 3
d. :6;$$$ G 1.26$ G 2
Items 23 t#roug# 26 appl% to t#e appropriate use of present value tables. Eiven belo(
are t#e present value factors for :1.$$ discounted at 1$8 for one to five periods. /ac# of
t#e items 23 to 26 is based on 1$8 interest compounded annuall%.
&resent Falue of :1
&eriods Discounted at 1$8 per &eriod
1 $.$
2 $.826
3 $.751
4 $.683
5 $.621
23. If an individual put :5;$$$ in a savings account toda%; (#at amount of cas#
(ould be available t(o %ears from toda%9
a. :5;$$$ G $.826
b. :5;$$$ G $.826 2
c. :5;$$$ H $.826
d. :5;$$$ H $.$ 2
24. 7#at is t#e present value toda% of :8;$$$ to be received si. %ears from toda%9
a. :8;$$$ G $.$ G 6
b. :8;$$$ G $.751 G 2
c. :8;$$$ G $.621 G $.$
d. :8;$$$ G $.683 G 3
25. 7#at amount s#ould be deposited in a ban0 toda% to gro( to :6;$$$ t#ree %ears
from toda%9
a. :6;$$$ H $.751
b. :6;$$$ G $.$ G 3
c. +:6;$$$ G $.$, @ +:6;$$$ G $.826, @ +:6;$$$ G $.751,
d. :6;$$$ G $.751
26. 7#at amount s#ould an individual #ave in a ban0 account toda% before
(it#dra(al if :1$;$$$ is needed eac# %ear for four %ears (it# t#e first (it#dra(al
to be made toda% and eac# subse*uent (it#dra(al at one-%ear intervals9 +<#e
balance in t#e ban0 account s#ould be Iero after t#e fourt# (it#dra(al.,
a. :1$;$$$ @ +:1$;$$$ G $.$, @ +:1$;$$$ G $.826, @ +:1$;$$$ G $.751,
b. :1$;$$$ H $.683 G 4
c. +:1$;$$$ G $.$, @ +:1$;$$$ G $.826, @ +:1$;$$$ G $.751, @ +:1$;$$$ G
$.683,
d. :1$;$$$ H $.$ G 4
27. If a savings account pa%s interest at 48 compounded *uarterl%; t#en t#e amount
of :1 left on deposit for 6 %ears (ould be found in a table using
a. 6 periods at 48.
b. 6 periods at 18.
c. 24 periods at 48.
d. 24 periods at 18.
28. !t t#e end of t(o %ears; (#at (ill be t#e balance in a savings account pa%ing 68
annuall% if :1$;$$$ is deposited toda%9 <#e future value of one at 68 for one
period is 1.$6.
a. :1$;$$$
b. :1$;6$$
c. :11;2$$
d. :11;236
2. Dn ?anuar% 1; 2$$1; t#e )arl% )ompan% decided to begin accumulating a fund for
asset replacement five %ears later. <#e compan% plans to ma0e five annual
deposits of :2$;$$$ at 8 eac# ?anuar% 1 beginning in 2$$1. 7#at (ill be t#e
balance in t#e fund; (it#in :1$; on ?anuar% 1; 2$$6 +one %ear after t#e last
deposit,9 <#e follo(ing 8 interest factors ma% be used.
&resent Falue of 'uture Falue of
Drdinar% !nnuit% Drdinar% !nnuit%
4 periods 3.237 4.5731
5 periods 3.887 5.847
6 periods 4.485 7.5233
a. :13$;466
b. :11;64
c. :1$;$$$
d. :1$$;$$$
3$. =o( muc# must be deposited on ?anuar% 1; 2$$$ in a savings account pa%ing 68
annuall% in order to ma0e annual (it#dra(als of :3;$$$ at t#e end of t#e %ears
2$$$ and 2$$19 <#e present value of one at 68 for one period is .434.
a. :5;5$$
b. :5;661
c. :6;$$$
d. :2;67$
31. =o( muc# must be invested no( to receive :2$;$$$ for 15 %ears if t#e first
:2$;$$$ is received toda% and t#e rate is 89
&resent Falue of
&eriods Drdinar% !nnuit% at 8
14 7.78615
15 8.$6$6
16 8.31256
a. :161;214
b. :175;723
c. :3$$;$$$
d. :146;251
Use t#e follo(ing 88 interest factors for *uestions 32 t#roug# 35.
&resent Falue of 'uture Falue of
Drdinar% !nnuit% Drdinar% !nnuit%
7 periods 5.2$64 8.228$
8 periods 5.7466 1$.63663
periods 6.246 12.48756
32. 7#at (ill be t#e balance on 2eptember 1; 2$$7 in a fund (#ic# is accumulated b%
ma0ing :12;$$$ annual deposits eac# 2eptember 1 beginning in 2$$$; (it# t#e
last deposit being made on 2eptember 1; 2$$79 <#e fund pa%s interest at 88
compounded annuall%.
a. :127;64$
b. :1$7;$74
c. :$;72$
d. :68;5
33. If :8;$$$ is deposited annuall% starting on ?anuar% 1; 2$$1 and it earns 88; (#at
(ill t#e balance be on December 31; 2$$89
a. :71;382
b. :77;$3
c. :85;$3
d. :1;$1
34. =enson )ompan% (is#es to accumulate :2$$;$$$ b% 3a% 1; 2$$ b% ma0ing 8
e*ual annual deposits beginning 3a% 1; 2$$1 to a fund pa%ing 88 interest
compounded annuall%. 7#at is t#e re*uired amount of eac# deposit9
a. :34;8$3
b. :18;8$3
c. :17;41$
d. :2$;156
35. 7#at amount s#ould be recorded as t#e cost of a mac#ine purc#ased December
31; 2$$$; (#ic# is to be financed b% ma0ing 8 annual pa%ments of :;$$$ eac#
beginning December 31; 2$$19 <#e applicable interest rate is 88.
a. :63;$$$
b. :56;222
c. :5;73$
d. :51;71
36. 'o.. )ompan% financed t#e purc#ase of a mac#ine b% ma0ing pa%ments of
:6;$$$ at t#e end of eac# of five %ears. <#e appropriate rate of interest (as 88.
<#e future value of one for five periods at 88 is 1.4633. <#e future value of an
ordinar% annuit% for five periods at 88 is 5.8666. <#e present value of an
ordinar% annuit% for five periods at 88 is 3.271. 7#at (as t#e cost of t#e
mac#ine to 'o..9
a. :8;816
b. :23;56
c. :3$;$$$
d. :35;2$$
37. ! mac#ine is purc#ased b% ma0ing pa%ments of :8;$$$ at t#e beginning of eac#
of t#e ne.t five %ears. <#e interest rate (as 1$8. <#e future value of an ordinar%
annuit% of 1 for five periods is 6.1$51$. <#e present value of an ordinar% annuit%
of 1 for five periods is 3.7$7. 7#at (as t#e cost of t#e mac#ine9
a. :53;725
b. :48;841
c. :33;35
d. :3$;326
38. )line )o. #as a mac#ine t#at cost :3$$;$$$. It is to be leased for 2$ %ears (it#
rent received at t#e beginning of eac# %ear. )line (ants a return of 1$8.
)alculate t#e amount of t#e annual rent.
&resent Falue of
&eriod Drdinar% !nnuit%
1 8.3642
2$ 8.51356
21 8.6486
a. :32;$34
b. :35;864
c. :44;52
d. :35;238
3. 'ind t#e present value of an investment in plant and e*uipment if it is e.pected to
provide annual earnings of :42;$$$ for 15 %ears and to #ave a resale value of
:8$;$$$ at t#e end of t#at period. !ssume a 1$8 rate and earnings at %ear end.
<#e present value of 1 at 1$8 for 15 periods is .233. <#e present value of an
ordinar% annuit% at 1$8 for 15 periods is 7.6$6$8. <#e future value of 1 at 1$8
for 15 periods is 4.17725.
a. :31;456
b. :338;6$6
c. :37$;552
d. :64;152
4$. Dn ?anuar% 2; 2$$1; Fic0 )orporation (is#es to issue :3$$;$$$ +par value, of its
88; 1$-%ear bonds. <#e bonds pa% interest annuall% on ?anuar% 1. <#e current
%ield rate on suc# bonds is 1$8. Using t#e interest factors belo(; compute t#e
amount t#at Fic0 (ill realiIe from t#e sale +issuance, of t#e bonds.
&resent value of 1 at 88 for 1$ periods $.4632
&resent value of 1 at 1$8 for 1$ periods $.3855
&resent value of an ordinar% annuit% at 88 for 1$ periods 6.71$1
&resent value of an ordinar% annuit% at 1$8 for 1$ periods 6.1446
a. :3$$;$$$
b. :263;12$
c. :3$$;$$2
d. :331;8$8
Note: 2tudents must be given interest tables for *uestion 41.
41. <#e mar0et price of a :4$$;$$$; ten-%ear; 128 +pa%s interest semiannuall%, bond
issue sold to %ield an effective rate of 1$8 is
a. :44;156.
b. :44;85$.
c. :453;3$8.
d. :748;44.
Mult#ple C2o#ce Anse!sCo$putat#onal
1. c 23. c 27. d 31. b 35. d 3. b
2$. b 24. c 28. d 32. a 36. b 4$. b
21. a 25. d 2. a 33. d 37. c 41. b
22. b 26. a 3$. a 34. c 38. a
MULTIPLE CHOICECPA A%apte%
42. Dn 3a% 1; 2$$1 a compan% purc#ased a ne( mac#ine (#ic# it does not #ave to
pa% for until 3a% 1; 2$$3. <#e total pa%ment on 3a% 1; 2$$3 (ill include bot#
principal and interest. !ssuming interest at a 1$8 rate; t#e cost of t#e mac#ine
(ould be t#e total pa%ment multiplied b% (#at time value of mone% factor9
a. 'uture value of annuit% of 1
b. 'uture value of 1
c. &resent value of annuit% of 1
d. &resent value of 1
43. 'or (#ic# of t#e follo(ing transactions (ould t#e use of t#e present value of an
ordinar% annuit% concept be appropriate in calculating t#e present value of t#e
asset obtained or t#e liabilit% o(ed at t#e date of incurrence9
a. ! capital lease is entered into (it# t#e initial lease pa%ment due one mont#
subse*uent to t#e signing of t#e lease agreement.
b. ! capital lease is entered into (it# t#e initial lease pa%ment due upon t#e
signing of t#e lease agreement.
c. ! ten-%ear 88 bond is issued on ?anuar% 2 (it# interest pa%able semiannuall%
on ?anuar% 2 and ?ul% 1 %ielding 78.
d. ! ten-%ear 88 bond is issued on ?anuar% 2 (it# interest pa%able semiannuall%
on ?anuar% 2 and ?ul% 1 %ielding 8.
44. Dn ?anuar% 15; 2$$1; /lgin )orp. adopted a plan to accumulate funds for
environmental improvements beginning ?ul% 1; 2$$5; at an estimated cost of
:1;5$$;$$$. /lgin plans to ma0e four e*ual annual deposits in a fund t#at (ill
earn interest at 1$8 compounded annuall%. <#e first deposit (as made on ?ul% 1;
2$$1. 'uture value factors are as follo(s5
'uture value of 1 at 1$8 for 5 periods
1.61
'uture value of ordinar% annuit% of 1 at 1$8 for 4 periods
4.64
'uture value of annuit% due of 1 at 1$8 for 4 periods
5.11
/lgin s#ould ma0e four annual deposits +rounded, of
a. :266;82$.
b. :23;52$.
c. :323;28$.
d. :375;$$$.
45. Dn December 3$; 2$$1; D%e; Inc. purc#ased a mac#ine from 'ran0 )orp. in
e.c#ange for a noninterest-bearing note re*uiring eig#t pa%ments of :2$;$$$.
<#e first pa%ment (as made on December 3$; 2$$1; and t#e ot#ers are due
annuall% on December 3$. !t date of issuance; t#e prevailing rate of interest for
t#is t%pe of note (as 118. &resent value factors are as follo(s5
&resent Falue of Drdinar% &resent Falue of
&eriod !nnuit% of 1 at 118 !nnuit% Due of 1 at 118
7 4.712 5.231
8 5.146 5.712
Dn D%eJs December 31; 2$$1 balance s#eet; t#e net note pa%able to 'ran0 is
a. :4;24$.
b. :1$2;2$.
c. :1$4;62$.
d. :114;24$.
46. On anuary !, "##!, $ar% &o. sold goods to &o% &ompany. &o% signed a
noninterest'bearing note requiring payment of ()#,### annually for seven years.
*he first payment +as made on anuary !, "##!. *he prevailing rate of interest
for this type of note at date of issuance +as !#%. Information on present value
factors is as follo+s,
&resent Falue &resent Falue of Drdinar%
&eriod of 1 at 1$8 !nnuit% of 1 at 1$8
6 .5645 4.3553
7 .5132 4.8684
3ar. s#ould record sales revenue in ?anuar% 2$$1 of +rounded,
a. :16$;66$.
b. :146;$5$.
c. :13$;66$.
d. :1$7;1$$.
47. Dn ?anuar% 1; 2$$1; )o. )o. e.c#anged e*uipment for a :12$;$$$ noninterest-
bearing note due on ?anuar% 1; 2$$4. <#e prevailing rate of interest for a note of
t#is t%pe at ?anuar% 1; 2$$1 (as 1$8. <#e present value of :1 at 1$8 for t#ree
periods is $.75. 7#at amount of interest revenue s#ould be included in )o.Js
2$$2 income statement9
a. :$
b. :;$$$
c. :;$$
d. :12;$$$
48. Dn ?anuar% 1; 2$$1; Erant )o. issued ten-%ear bonds (it# a face amount of
:3;$$$;$$$ and a stated interest rate of 88 pa%able annuall% on ?anuar% 1. <#e
bonds (ere priced to %ield 1$8. &resent value factors are as follo(s5
!t 88
!t 1$8
&resent value of 1 for 1$ periods $.463
$.386
&resent value of an ordinar% annuit% of 1 for 1$ periods 6.71$
6.145
<#e total issue price +rounded, of t#e bonds (as
a. :3;$$$;$$$.
b. :2;4$;$$$.
c. :2;76$;$$$.
d. :2;632;8$$.
4. Dn ?anuar% 1; 2$$1; 1an0 )o. sold to Da% )orp. :4$$;$$$ of its 1$8 bonds for
:354;118 to %ield 128. Interest is pa%able semiannuall% on ?anuar% 1 and ?ul% 1.
7#at amount s#ould 1an0 report as interest e.pense for t#e si. mont#s ended
?une 3$; 2$$19
a. :17;7$6
b. :2$;$$$
c. :21;247
d. :24;$$$
5$. Dn ?ul% 1; 2$$1; /d Kates signed an agreement to operate as a franc#isee of L(i0
'oods; Inc.; for an initial franc#ise fee of :6$;$$$. Df t#is amount; :2$;$$$ (as
paid (#en t#e agreement (as signed and t#e balance is pa%able in four e*ual
annual pa%ments of :1$;$$$ beginning ?ul% 1; 2$$2. <#e agreement provides t#at
t#e do(n pa%ment is not refundable and no future services are re*uired of t#e
franc#isor. KatesJ credit rating indicates t#at #e can borro( mone% at 148 for a
loan of t#is t%pe. Information on present and future value factors is as follo(s5
&resent value of 1 at 148 for 4 periods
$.5
'uture value of 1 at 148 for 4 periods
1.6
&resent value of an ordinar% annuit% of 1 at 148 for 4 periods
2.1
Kates s#ould record t#e ac*uisition cost of t#e franc#ise on ?ul% 1; 2$$1 at
a. :43;6$$.
b. :4;1$$.
c. :6$;$$$.
d. :67;6$$.
Mult#ple C2o#ce Anse!sCPA A%apte%
42. d 44. b 46. a 48. d 5$. b
43. a 45. a 47. c 4. c
DERIVATION' Co$putat#onal
No" Anse! De!#3at#on
1. c 1.26$ G &F 6 :1$;$$$M &F 6 :1$;$$$ H 1.26$.
2$. b 1.26$ G :5;$$$.
21. a +:8;$$$ G 1.26$, @ +:8;$$$ G 1.166, @ +:8;$$$ G 1.$8$, @ :8;$$$.
22. b :6;$$$ G +1.$8$,
6
or :6;$$$ G 1.46 G 1.$8$.
23. c $.826 G &F 6 :5;$$$M &F 6 :5;$$$ H $.826.
24. c :58;$$$ G $.621 G $.$.
25. d :6;$$$ G $.751.
26. a :1$;$$$ @ +:1$;$$$ G $.$, @ +:1$;$$$ G $.826, @ +:1$;$$$ G
$.751,.
27. d 4 G 6 6 24 periodsM 48 H 4 6 18.
28. d :1$;$$$ G +1.$6,
2
6 :11;236.
2. a :2$;$$$ G +7.5233 A 1, 6 :13$;466 or :2$;$$$ G 5.847 G 1.$.
3$. a +:3;$$$ G $.434, @ N:3;$$$ G +$.434,
2
O 6 :5;5$$.
31. b :2$;$$$ G +7.78615 @ 1, 6 :175;723 or :2$;$$$ G 8.$6$6 G
1.$.
32. a :12;$$$ G 1$.6366 6 :127;64$.
33. d :8;$$$ G +12.4876 A 1, 6 :1;$1 or :8;$$$ G 1$.6366 G 1.$8.
34. c +1$.63663 G 1.$8, G > 6 :2$$;$$$M > 6 :2$$;$$$ H 11.48756 6
:17;41$.
35. d :;$$$ G 5.7466 6 :51;71.
36. b :6;$$$ G 3.271 6 :23;56.
37. c :8;$$$ G +3.7$7 G 1.1$, 6 :8;$$$ G 4.1687 6 :33;35.
38. a :3$$;$$$ 6 > G +8.51356 G 1.1$,M > 6 :3$$;$$$ H .3642 6
:32;$34.
3. b +:42;$$$ G 7.6$6$8, @ +:8$;$$$ G .233, 6 :338;6$6.
4$. b :3$$;$$$ G .$8 6 :24;$$$ +annual interest pa%ment, +:24;$$$ G
6.1446, @ +:3$$;$$$ G $.3855, 6 :263;12$.
41. b :4$$;$$$ G .$6 6 :24;$$$ +semiannual interest pa%ment,
+:24;$$$ G 12.46221, @ +:4$$;$$$ G .3768, 6 :44;85$.
DERIVATION' CPA A%apte%
No" Anse! De!#3at#on
42. d )onceptual.
43. a )onceptual.
44. b 5.11 G > 6 :1;5$$;$$$M > 6 :1;5$$;$$$ H 5.11 6 :23;542.
45. a :2$;$$$ G 4.712 6 :4;24$ or +:2$;$$$ G 5.712, A :2$;$$$ 6
:4;24$.
46. a :3$;$$$ G +4.8684 G 1.1, 6 :16$;66$ or +:3$;$$$ G 4.3553, @
:3$;$$$ 6 :16$;66$.
47. c :12$;$$$ G .75 6 :$;$$$ +present value of note,
:$;$$$ G 1.1$ 6 :;$$$M :;$$$ G $.1$ 6 :;$$.
48. d :3;$$$;$$$ G .$8 6 :24$;$$$
+:24$;$$$ G 6.145, @ +:3;$$$;$$$ G $.386, 6 :2;632;8$$.
4. c :354;118 G .$6 6 :21;247.
5$. b +:1$;$$$ G 2.1, @ :2$;$$$ 6 :4;1$$.
E&ERCI'E'
E4" 65/+P&resent and future value concepts.
Dn t#e rig#t are si. diagrams representing si. different present and future value concepts
stated on t#e left. Identif% t#e diagrams (it# t#e concepts b% (riting t#e identif%ing letter
of t#e diagram on t#e blan0 line at t#e left. !ssume n 6 4 and i 6 88.
)oncept Diagram of )oncept
QQQQQ 1. 'uture value of 1. 6
7+
a" 8 8 8 8
8
QQQQQ 2. &resent value of 1.

6
QQQQQ 3. 'uture value of an annuit% 7+ 7+ 7+
7+
due of 1. 9" 85 5 5 5 5 8 8
8 8
QQQQQ 4. 'uture value of an ordinar%
annuit% of 1. 6
7+ 7+ 7+ 7+
QQQQQ 5. &resent value of an ordinar% c" 8 8 8 85 5
5 5 8
annuit% of 1.
QQQQQ 6. &resent value of an annuit% 6 7+ 7+ 7+
7+
due of 1. %" 8 8 8 8
8
7+
6
e" 8 8 8 8
8
7+ 7+ 7+ 7+
6
:" 8 8 8 8
8
Solution 6-51
1. e 2. a 3. f 4. b 5. d 6. c
E4" 65/,P&resent value of an annuit% due. +<ables needed.,
=o( muc# must be invested no( to receive :2$;$$$ for ten %ears if t#e first :2$;$$$ is
received toda% and t#e rate is 889
Solution 6-52
&resent value of an annuit% due of :2$;$$$ for ten periods at 88 +:2$;$$$ G 7.2468, 6
:144;38.
E4" 65/-P'uture value of an annuit% due. +<ables needed.,
If :6;$$$ is deposited annuall% starting on ?anuar% 1; 2$$1 and it earns 8; #o( muc#
(ill accumulate b% December 31; 2$1$9
Solution 6-53
'uture value of an annuit% due of :6;$$$ for 1$ periods at 8
+:6;$$$ G 15.123 G 1.$, 6 :;362.
E4" 65/.P)ompute good(ill. +<ables needed.,
)ompute good(ill if it is found b% discounting e.cess earnings at 1$8 compounded
*uarterl%. /.cess annual earnings of :16;$$$ are e.pected for 8 %ears.
Solution 6-54
&resent value of :4;$$$ for 32 periods at 2.58 +:4;$$$ G 21.8418, 6 :87;37.
E4" 65//P)ompute t#e annual rent. +<ables needed.,
)are% )o. #as mac#iner% t#at cost :6$;$$$. It is to be leased for 15 %ears (it# rent
received at t#e beginning of eac# %ear. )are% (ants a return of 1$8. )ompute t#e
amount of t#e annual rent.
Solution 6-55
&resent value factor for an annuit% due for 15 periods at 1$8 +1.1$ 7.6$6$8, 6 8.3666
:6$;$$$ H 8.3666 6 :7;171.
E4" 65/6P&resent value of an investment in e*uipment. +<ables needed.,
'ind t#e present value of an investment in e*uipment if it is e.pected to provide annual
savings of :8;$$$ for 1$ %ears and to #ave a resale value of :2$;$$$ at t#e end of t#at
period. !ssume an interest rate of 8 and t#at savings are realiIed at %ear end.
Solution 6-56
&resent value of :8;$$$ for 1$ periods at 8 +6.41766 G :8;$$$, 6 :51;341
&resent value of :2$;$$$ discounted for 1$ periods at 8 +.42241 G :2$;$$$, 6 8;448
&resent value of investment in e*uipment :5;78
E4" 65/1P)alculate mar0et price of a bond. +<ables needed.,
Determine t#e mar0et price of a :5$$;$$$; ten-%ear; 1$8 +pa%s interest semiannuall%,
bond issue sold to %ield an effective rate of 128.
Solution 6-57
&resent value of :25;$$$ for 2$ periods at 68 +:25;$$$ G 11.462, 6 :286;748
&resent value of :5$$;$$$ discounted for 2$ periods at 68 +:5$$;$$$ G .3118$, 6
155;$$
3ar0et price of t#e bond issue :442;648
E4" 65/;P)alculate mar0et price of a bond.
Dn ?anuar% 1; 2$$1 Liner )o. issued five-%ear bonds (it# a face value of :3$$;$$$ and a
stated interest rate of 128 pa%able semiannuall% on ?ul% 1 and ?anuar% 1. <#e bonds
(ere sold to %ield 1$8. &resent value table factors are5
&resent value of 1 for 5 periods at 1$8 .62$2
&resent value of 1 for 5 periods at 128 .56743
&resent value of 1 for 1$ periods at 58 .6131
&resent value of 1 for 1$ periods at 68 .5583
&resent value of an ordinar% annuit% of 1 for 5 periods at 1$8 3.7$7
&resent value of an ordinar% annuit% of 1 for 5 periods at 128 3.6$478
&resent value of an ordinar% annuit% of 1 for 1$ periods at 58 7.72173
&resent value of an ordinar% annuit% of 1 for 1$ periods at 68 7.36$$
)alculate t#e issue price of t#e bonds.
Solution 6-58
&resent value of :3$$;$$$ discounted for 1$ periods at 58 +:3$$;$$$ G .6131, 6
:184;173
&resent value of :18;$$$ for 1$ periods at 58 +:18;$$$ G 7.72173, 6 138;1
Issue price of t#e bonds :323;164
PRO(LEM'
P!" 65/<P&resent value and future value computations.
&art +a, )ompute t#e amount t#at a :25;$$$ investment toda% (ould accumulate at 1$8
+compound interest, b% t#e end of 6 %ears.
&art +b, 2teve (ants to retire at t#e end of t#is %ear +2$$1,. =is life e.pectanc% is 2$
%ears from #is retirement. 2teve #as come to %ou; #is )&!; to learn #o( muc#
#e s#ould deposit on December 31; 2$$1 to be able to (it#dra( :3$;$$$ at t#e
end of eac# %ear for t#e ne.t 2$ %ears; assuming t#e amount on deposit (ill earn
88 interest annuall%.
&art +c, 3ar% =ouser #as a :$$ overdue debt for medical boo0s and supplies at ?imJs
Roo0store. 2#e #as onl% :3$$ in #er c#ec0ing account and doesnJt (ant #er
parents to 0no( about t#is debt. ?imJs tells #er t#at s#e ma% settle t#e account
in one of t(o (a%s since s#e canJt pa% it all no(5
1. &a% :3$$ no( and :7$$ (#en s#e completes #er residenc%; t(o %ears from
toda%.
2. &a% :1;2$$ one %ear after completion of residenc%; t#ree %ears from toda%.
!ssuming t#at t#e cost of mone% is t#e onl% factor in 3ar%Js decision and t#at
t#e cost of mone% to #er is 88; (#ic# alternative s#ould s#e c#oose9 Kour
ans(er must be supported (it# calculations.
Solution 6-59
&art +a, 'uture value of :25;$$$ compounded S 1$8 for 6 %ears
+:25;$$$ G 1.77156, 6 :44;28.
&art +b, &resent value of a :3$;$$$ ordinar% annuit% discounted S 88 for 2$ %ears
+:3$;$$$ G .81815, 6 :24;545.
&art +c, !lternative 1
&resent value of :7$$ discounted S 88 for 2 %ears
+:7$$ G .85734, 6 &resent value of :7$$ no( 6 :6$$
&resent value of :3$$ no( 6 3$$
&resent value of !lternative 1 :$$
!lternative 2
&resent value of :1;2$$ discounted S 88 for 3 %ears
+:1;2$$ G .7383, :53

Dn t#e present value basis; !lternative 1 is preferable.
P!" 656=P&resent value of an ordinar% annuit% due.
?ill 4orris is presentl% leasing a small business computer from >ice Dffice /*uipment
)ompan%. <#e lease re*uires 1$ annual pa%ments of :2;$$$ at t#e end of eac# %ear and
provides t#e lessor +>ice, (it# an 88 return on its investment.
+a, !ssuming t#e computer #as a ten-%ear life and (ill #ave no salvage value at t#e
e.piration of t#e lease; (#at (as t#e original cost of t#e computer to >ice9
+b, 7#at amount (ould eac# pa%ment be if t#e ten annual pa%ments are to be made at t#e
beginning of eac# period9
Kou ma% use t#e follo(ing 88 interest factors5
&eriods 1$ &eriods 11
&eriods
'uture Falue of 1 1.$$ 2.1582
2.33164
&resent Falue of 1 .5$$25 .4631 .42888
'uture Falue of Drdinar% !nnuit% of 1 12.48756 14.48656
16.6454
&resent Falue of Drdinar% !nnuit% of 1 6.2468 6.71$$8
7.1386
&resent Falue of !nnuit% Due of 1 6.74664 7.2468
7.71$$8
Solution 6-60
&resent value of an ordinar% annuit% of :2;$$$ at 88 for 1$ %ears is
6.71$$8 G :2;$$$ 6 :13;42$
&resent value factor for an annuit% due of :2;$$$ at 88 for 1$ %ears is
7.2468M :13;42$ H 7.2468 6 :1;852
P!" 656+P!nnuit% (it# c#ange in interest rate.
3eg 2loan establis#ed a savings account for #er sonJs college education b% ma0ing
annual deposits of :5;$$$ at t#e beginning of eac# of si. %ears to a savings account
pa%ing 88. !t t#e end of t#e si.t# %ear; t#e account balance (as transferred to a ban0
pa%ing 1$8; and annual deposits of :5;$$$ (ere made at t#e end of eac# %ear from t#e
sevent# t#roug# t#e tent# %ears. 7#at (as t#e account balance at t#e end of t#e tent#
%ear9
Solution 6-61
Kears 1-65 'uture value of annuit% due of :5;$$$ for 6 periods at 885
+7.3352 G 1.$8, G :5;$$$ 6 :3;614
Kears 7-1$5 'uture value of :3;614 for 4 periods at 1$85
1.4641 G :3;614 6 :57;
'uture value of ordinar% annuit% of :5;$$$ for 4 periods at 1$85
4.641$ G :5;$$$ 6 :23;2$5
2um in ban0 at end of tent# %ear5
:23;2$5 @ :57; 6 :81;2$4
P!" 656,P'inding t#e implied interest rate.
Doane )ompan% #as entered into t(o lease agreements. In eac# case t#e cas# e*uivalent
purc#ase price of t#e asset ac*uired is 0no(n and %ou (is# to find t#e interest rate (#ic#
is applicable to t#e lease pa%ments.
Inst!uct#ons
)alculate t#e implied interest rate for t#e lease pa%ments.
1ease ! P 1ease ! covers office e*uipment (#ic# could be purc#ased for :37;$7.$.
Doane )ompan% #as; #o(ever; c#osen to lease t#e e*uipment for :1$;$$$ per %ear;
pa%able at t#e end of eac# of t#e ne.t 5 %ears.
1ease R P 1ease R applies to a mac#ine (#ic# can be purc#ased for :48;448.2$. Doane
)ompan% #as c#osen to lease t#e mac#ine for :12;$$$ per %ear on a 5-%ear lease.
&a%ments are due at t#e start of eac# %ear.
Solution 6-62
1ease ! P )alculation of t#e Implied Interest >ate5
:1$;$$$ G +factor for &resent Falue of Drdinar% !nnuit% for 5 %rs., 6
:37;$7.$
'actor for &resent Falue of Drdinar% !nnuit% for 5 %rs. 6 :37;$7.$
:1$;$$$
6 3.7$7
<#e 3.7$7 factor implies a 1$8 interest rate.
1ease R P )alculation of t#e Implied Interest >ate5
:12;$$$ G +factor for &resent Falue of !nnuit% Due for 5 %rs., 6 :48;448.2$
'actor for &resent Falue of !nnuit% Due for 5 %rs.6 :48;448.2$ H :12;$$$
6 4.$3735
'olut#on 656, +cont.,
<#e 4.$3735 factor implies a 128 interest rate +present value of an annuit% due table,.
P!" 656-P)alculation of un0no(n rent and interest.
2tiner 1easing )ompan% purc#ased specialiIed e*uipment from 7a%ne )ompan% on
December 31; 2$$1 for :6$$;$$$. Dn t#e same date; it leased t#is e*uipment to 2ears
)ompan% for 5 %ears; t#e useful life of t#e e*uipment. <#e lease pa%ments begin ?anuar%
1; 2$$2 and are made ever% 6 mont#s until ?ul% 1; 2$$6. 2tiner 1easing (ants to earn
1$8 annuall% on its investment.
Farious 'actors at 1$8
&eriods 'uture &resent 'uture Falue of an &resent Falue of an
or >ents Falue of :1 Falue of :1 Drdinar% !nnuit% Drdinar% !nnuit%
2.3575 .4241$ 13.5748 5.75$2
1$ 2.5374 .38554 15.3743 6.14457
11 2.85312 .35$4 18.53117 6.45$6
Farious 'actors at 58
&eriods 'uture &resent 'uture Falue of an &resent Falue of an
or >ents Falue of :1 Falue of :1 Drdinar% !nnuit% Drdinar% !nnuit%
1.55133 .64461 11.$2656 7.1$782
1$ 1.6288 .6131 12.5778 7.72173
11 1.71$34 .58468 14.2$67 8.3$641
Inst!uct#ons
+a, )alculate t#e amount of eac# rent.
+b, =o( muc# interest revenue (ill 2tiner earn in 2$$29
Solution 6-63
+a, )alculation of rent5 7.72173 1.$5 6 8.1$782
+present value of a 1$-rent annuit% due at 58., :6$$;$$$ 8.1$782 6 :74;$$3.
+b, Interest >evenue during 2$$25
)as# Interest 1ease
>ent 4o. Date >eceived >evenue >eceivable
1 1T1T$2 :74;$$3 : -$- :525;7
2 7T1T$2 74;$$3 26;3$$ 478;24
4one 12T31T$2 4one 23;15 +!ccrual,
<otal :5$;215
P!" 656.PDeferred annuit%.
)arle% )ompan% o(ns a plot of land on (#ic# buried to.ic (astes #ave been discovered.
2ince it (ill re*uire several %ears and a considerable sum of mone% before t#e propert% is
full% deto.ified and capable of generating revenues; )arle% (is#es to sell t#e land no(.
It #as located t(o potential bu%ers5 Ru%er !; (#o is (illing to pa% :255;$$$ for t#e land
no(; and Ru%er R; (#o is (illing to ma0e 2$ annual pa%ments of :4$;$$$ eac#; (it# t#e
first pa%ment to be made 5 %ears from toda%. !ssuming t#at t#e appropriate rate of
interest is 8; to (#om s#ould )arle% sell t#e land9 2#o( calculations.
Solution 6-64
Ru%er !. <#e present value of t#e purc#ase price is :255;$$$.

Ru%er R. <#e present value of t#e purc#ase price is5
&resent value of ordinar% annuit% of :4$;$$$ for 24 periods at 8 .7$661
1ess present value of ordinar% annuit% of :4$;$$$ for 4 periods +deferred, at 8
3.2372
Difference 6.4668
3ultiplied b% annual pa%ments G :4$;$$$
&resent value of pa%ments :258;676
)onclusion5 )arle% s#ould sell to Ru%er R.