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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Purchase of Asset William Thomas intends to purchase a tractor on credit. Two local implement dealers have offered him the following payment plans for identical tractors:

  1. 1. Redd Truck & Tractor’s plan calls for 5 annual payments of $10,350 with the first payment now and the remaining payments at the beginning of each of the next 4 years.
  2. 2. Greene Farm Implements requires semiannual payments of $5,750 at the end of each of the next 10 semiannual periods, with the first payment to be in 6 months.

Required:

Determine which of the preceding plans offers William the lower present value. The applicable annual interest rate is 10% for both alternatives.

To determine

Determine the best plan that offers person W the lower present value.

Explanation

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.

Offer 1: RT&T’ plan

Calculate the present value of RT&T’s plan.

Present valueD= Cash flow ×(PDn=5,i=10%)=$10,350×4.169865=$43,158.10

Therefore, the present value of RT&T’s plan is $43,158.10.

Offer 2: G’s plan

Calculate the present value of G’s plan.

Present valueO= Cash flow ×(Pon=10, i=5%)=$5,750×7

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