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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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 table in Exhibit 8.

b. By using the present value table in Exhibit 10.

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

  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 10.

(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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