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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207

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BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207
Textbook Problem

Present value of an annuity

Determine the present value of $200,000 to be received at the end of each of four years, using an interest rate of 7%, compounded annually, as follows:

A. By successive computations, using the present value of $1 table in Exhibit 5.

B. By using the present value of an annuity of $1 table in Exhibit 7.

C. why is the present value of the four $200,000 cash receipts less than the $800,000 to be received in the future?

A.

To determine

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

To calculate: The present value of $200,000 (Future amount).

Explanation

Calculate the present value of $200,000 (Future amount) by using present value table in Exhibit 5.

  Calculation Present Value
First Year $200,000×0.93458 $186,916
Second Year $200,000×0

B.

To determine

To calculate: The present value of $200,000 (Future amount) by using present value table in Exhibit 7.

C.

To determine

To explain: The reason why present value of four $200,000 cash receipts is less than $800,000 to be received in future.

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