Financial & Managerial Accounting
13th Edition
ISBN: 9781285866307
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 12, Problem 12.3CP
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 determine: the payout option that Mr. A would select.
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Basic Present Value Concepts
The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby won the week’s grand prize totaling $1.6 million. The Slate Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $80,000 each.
Required:
1. If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings?
2. Is it correct to say that Mr. Ormsby is the “state’s newest millionaire”? Explain your answer.
Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:
Receive $100,000,000 in cash today.
Receive $25,000,000 today and $9,000,000 per year for eight years, with the first payment being received one year from today.
Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.
Assuming that the effective rate of interest is 7%, which payout option should Alex select? Use the present value tables in Appendix A. Explain your answer and provide any necessary supporting calculations.
Alex Kelton recently won the jackpot in the Colorado lottery while he was visiting his parents. When he arrived at the lottery office to collect his winnings, he was offered the following three payout options:
Receive $100,000,000 in cash today.
Receive $25,000,000 today and $9,000,000 per year for eight years, with the first payment being received one year from today.
Receive $15,000,000 per year for 10 years, with the first payment being received one year from today.
Assuming that the effective rate of interest is 7%, which payout option should Alex select?
Chapter 12 Solutions
Financial & Managerial Accounting
Ch. 12 - Describe the two distinct obligations incurred by...Ch. 12 - Explain the meaning of each of the following terms...Ch. 12 - Prob. 3DQCh. 12 - A corporation issues 26,000,000 of 9% bonds to...Ch. 12 - Prob. 5DQCh. 12 - The following data relate to a 2,000,000, 8% bond...Ch. 12 - Prob. 7DQCh. 12 - Prob. 8DQCh. 12 - Fleeson Company needs additional funds to purchase...Ch. 12 - Prob. 10DQ
Ch. 12 - Prob. 12.1APECh. 12 - Prob. 12.1BPECh. 12 - Issuing bonds at face amount On January 1, the...Ch. 12 - Prob. 12.2BPECh. 12 - Issuing bonds at a discount On the first day of...Ch. 12 - Prob. 12.3BPECh. 12 - Prob. 12.4APECh. 12 - Prob. 12.4BPECh. 12 - Prob. 12.5APECh. 12 - Prob. 12.5BPECh. 12 - Prob. 12.6APECh. 12 - Prob. 12.6BPECh. 12 - Redemption of bonds payable A 1,500,000 bond Issue...Ch. 12 - Prob. 12.7BPECh. 12 - Prob. 12.8APECh. 12 - Prob. 12.8BPECh. 12 - Prob. 12.9APECh. 12 - Prob. 12.9BPECh. 12 - Prob. 12.1EXCh. 12 - Prob. 12.2EXCh. 12 - Prob. 12.3EXCh. 12 - Prob. 12.4EXCh. 12 - Prob. 12.5EXCh. 12 - Prob. 12.6EXCh. 12 - Prob. 12.7EXCh. 12 - Entries for issuing and calling bonds; loss Adele...Ch. 12 - Entries for issuing and calling bonds; gain Emil...Ch. 12 - Entries for installment note transactions On the...Ch. 12 - Prob. 12.11EXCh. 12 - Entries for installment note transactions On...Ch. 12 - Prob. 12.13EXCh. 12 - Prob. 12.14EXCh. 12 - Prob. 12.15EXCh. 12 - Prob. 12.16EXCh. 12 - Present value of amounts due Tommy John is going...Ch. 12 - Present value of an annuity Determine the present...Ch. 12 - Prob. 12.19EXCh. 12 - Prob. 12.20EXCh. 12 - Prob. 12.21EXCh. 12 - Prob. 12.22EXCh. 12 - Amortize discount by interest method On the first...Ch. 12 - Prob. 12.24EXCh. 12 - Prob. 12.25EXCh. 12 - Prob. 12.26EXCh. 12 - Prob. 12.1APRCh. 12 - Prob. 12.2APRCh. 12 - Bond premium, entries for bonds payable...Ch. 12 - Prob. 12.4APRCh. 12 - Prob. 12.5APRCh. 12 - Prob. 12.6APRCh. 12 - Prob. 12.1BPRCh. 12 - Prob. 12.2BPRCh. 12 - Prob. 12.3BPRCh. 12 - Prob. 12.4BPRCh. 12 - Prob. 12.5BPRCh. 12 - Prob. 12.6BPRCh. 12 - Prob. 12.1CPCh. 12 - Prob. 12.2CPCh. 12 - Prob. 12.3CPCh. 12 - Preferred stock vs. bonds Xentec Inc. has decided...Ch. 12 - Prob. 12.5CPCh. 12 - Prob. 12.6CP
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