Exercise 6-9

1. Choose the option with the highest present value.

(1) PV = $64,000

(2) PV = $20,000 + $8,000 (4.91732)

Present value of an ordinary annuity of $1: n=6, i=6% (from Table 4)

PV = $20,000 + $39,339 = $59,339

(3) PV = $13,000 (4.91732) = $63,925

Alex should choose option (1).

2. FVA = $200,000 (13.8164) = $2,763,280

Future value of an ordinary annuity of $1: n=10, i=7% (from Table 3)

Exercise 6-12
PV = $75,000 (.82645) = $61,984 = Note/revenue
Present value of $1: n=2, i=10% (from Table 2)

Exercise 6-15
PVA = $10,000 x 4.35526= $43,553
Present value of an ordinary annuity of $1: n=6, i=10% (from Table 4)

PV = $43,553 x .82645= $35,994

Present value of $1: n=2, i=10% (from Table 2)

Or alternatively:
From Table 4,
PVA factor, n=8, i=10% = 5.33493

– PVA factor, n=2, i=10% = 1.73554

= PV factor for deferred annuity = 3.59939

PV = $10,000 x 3.59939 = $35,994

1
Problem 6-3
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=7 n=8

+ $50,000 (.42410**) + 40,000 (.38554**) + 800,000

(.38554**)
n=9 n=10
n=10

Present value of an ordinary annuity of $1: n=6, i=10% (from Table 4)

Present value of $1:, i=10% (from Table 2)

PV = $757,392 < $800,000

Since the PV is less than $800,000, the restaurant should not be

purchased.

Problem 6-4
Choose the option with the lowest present value of cash
payments.

1. PV = $1,100,000

2. PV = $420,000 + 80,000 (6.71008) = $956,806

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

3. PV = PVAD = $135,000 (7.24689) = $978,330

Present value of an annuity due of $1: n=10, i=8% (from Table 6)

4. PV = $1,600,000 (.68058) = $1,088,928

Present value of $1: n=5, i=8% (from Table 2)

Harding should choose option 2.

2
Problem 6-5
1.
PV of $1 factor = $40,000 = .5000
$80,000
Present value of $1: n=? , i=8% (from Table 2, n = approximately 9 years)

2.
Annuity factor =

Annuity factor = $20,500 = 4.1000

$5,000
Present value of an ordinary annuity of $1: n= 5, i=? (from Table 4, i =
approximately 7%)

3.
Annuity amount =

Annuity amount = $5,000 = $779 = Payment

6.41766
Present value of an ordinary annuity of $1: n=10, i=9% (from Table 4)

3
Problem 6-6
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 x 3.99271= $279,490
Present value of an ordinary annuity of $1: n=5, i=8% (from Table 4)

Years 6-10:

PVA = $70,000 x 3.79079= $265,355

Present value of an ordinary annuity of $1: n=5, i=10% (from Table 4)

PV = $265,355 x .68058 = $180,595

Present value of $1: n=5, i=8% (from Table 2)

Years 11-20:

PVA = $70,000 x 5.65022 = $395,515

Present value of an ordinary annuity of $1: n=10, i=12% (from Table 4)

PV = $395,515 x .62092 = $245,583

Present value of $1: n=5, i=10% (from Table 2)

PV = $245,583 x .68058 = $167,139

Present value of $1: n=5, i=8% (from Table 2)

End of Year 20:

PV = $500,000 x .32197x .62092 x .68058 = $68,030

Present value of $1: n=10, i=12% (from Table 2)

Total PV = $279,490 + 180,595 + 167,139 + 68,030 = $695,254

The maximum purchase price is $681,648.

4
Problem 6-7
Requirement 1
Present value of payments 4-6:

PVA = 40,000 x 2.48685 = 99,474

Present value of an ordinary annuity of $1: n= 3, i= 10% (from Table 4)

PV = 99,474 x .75131 = 74,736

Present value $1: n= 3, i= 10% (from Table 2)

Present value of all payments:

124,343 (PV of payments 1-3: $50,000 x 2.48685)

74,736 (PV of payments 4-6 calculated above)

199,079

The note payable and corresponding building should be recorded at

$199,079.

Or alternatively:

PV = 50,000 (2.48685) + 40,000 (1.86841) = 199,079

Present value of an ordinary annuity of $1: n=3, i=10% (from Table 4)

From Table 4,
PVA factor, n=6, i=10% = 4.35526
– PVA factor, n=3 i=10% = 2.48685
= PV factor for deferred annuity = 1.86841
Requirement 2

199,079 x 10% = 19,910 = Interest in the year 2006

5
Problem 6-10
Choose the alternative with the highest present value.

Alternative 1:

PV = $175,000

Alternative 2:

PV = PVAD = $16,000 (11.33560) = $181,370

Present value of an annuity due of $1: n=20, i=7% (from Table 6)

Alternative 3:

PVA = $50,000 x 7.02358 = $351,179

Present value of an ordinary annuity of $1: n=10, i=7% (from Table 4)

PV = $351,179 x .54393 = $191,017

Present value of $1: n=9, i=7% (from Table 2)

Steve should choose alternative 3.

Or, alternatively (for 3):

PV = $50,000 (3.82037) = $191,019

(difference due to rounding)

From Table 4,
PVA factor, n=19, i=7% = 10.33560
– PVA factor, n=9, i=7% = 6.51523
= PV factor for deferred annuity = 3.82037

or, From Table 6,

PVAD factor, n=20, i=7% = 11.33560

— PVAD factor, n=10, i=7% = 7.51523
= PV factor for deferred annuity = 3.82037
Problem 6-11
Requirement 1
PVAD = Annuity amount x Annuity factor

6
 Annuity amount =

Annuity amount = 800,000

7.24689
Present value of an annuity due of $1: n=10, i=8% (from Table 6)

Annuity amount = 110,392 = Lease payment

Requirement 2
Annuity amount = 800,000
6.71008
Present value of an ordinary annuity of $1: n=10, i=8% (from Table 4)

Annuity amount = 119,224 = Lease payment

Requirement 3
PVAD = (Annuity amount x Annuity factor) + PV of residual

Annuity amount =

PV of residual = 40,000 x .46319= 18,528

Present value of $1: n=10, i=8% (from Table 2)

Annuity amount = 800,000 – 18,528

7.24689
Present value of an annuity due of $1: n=10, i=8% (from Table 6)
Annuity amount = 107,835 = Lease payment

7
Problem 6-14
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)

Present value of an ordinary annuity of $1: n=10, i=12% (from Table 4)
Present value of $1: n=10, i=12% (from Table 2)

PV = - 160,000 - 28,251 + 3,220

PV = - 185,031

2. Lease option:

PVAD = - 26,000 (6.32825) = - 164,535

Present value of an annuity due of $1: n=10, i=12% (from Table 6)

China Gate should lease the machine.