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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter M, Problem 16P
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Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 18GI
Problem 19GI
Problem 20GI
Problem 21GI
Problem 22GI
Problem 23GI
Problem 24GI
Problem 25GI
Problem 26GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
Problem 1RE
Problem 2RE
Problem 3RE
Problem 4RE
Problem 5RE
Problem 6RE
Problem 7RE
Problem 8RE
Problem 9RE
Problem 10RE
Problem 11RE
Problem 12RE
Problem 13RE
Problem 14RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
Problem 7E
Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Present Value Issues Nello Construction Company has just purchased several major pieces of road-building equipment. Because the purchase price is so large, the equipment company is giving Nello an option of choosing one of four different payment plans:

  1. 1. $600,000 immediately in cash.
  2. 2. $200,000 down payment now; $65,000 per year for 12 years, beginning at the end of the current year.

Required:

Nello has asked you to decide which payment plan will provide the smallest present value. The expected effective interest rate during the future periods stated above is 12%.

To determine

Identify the plan which will provide the smallest 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.

Identify the plan which will provide the smallest present value.

Plan 1:

Present value of plan 1 is $600,000.

Plan 2:

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.

Determine the present value of $65,000 paid per year for 12 years, using the present value of ordinary annuity formula.

PVO=Cash flow×(pOn,i)=$65,000 ×(pOn=12,i=12%)=$65,000 ×6.194374=$402,634.31

Determine the present value of plan 2.

Present value of plan 2 = [Downpayment + Present value of$65,000 paid per year for 12 years]=$200,000+$402,634.31=$602,634.31

Therefore, the present value of plan 2 is $602,634.31.

Plan 3:

Determine the present value of $25,000 paid per year for 3 years, beginning at the end of 5 years, using the present value of ordinary annuity formula.

PVO=Cash flow×(pOn,i)=$25,000 ×(pOn=3,i=12%)=$25,000 ×2.401831=$60,045.78

Determine the present value of $75,000 paid per year for 11 years in period 4, beginning at the end of 4th year, using the present value of ordinary annuity formula.

PVO=Cash flow×(pOn,i)=$75,000 ×(pOn=11,i=12%)=$75,000 ×5

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Ch-M P-1GICh-M P-2GICh-M P-3GICh-M P-4GICh-M P-5GICh-M P-6GICh-M P-7GICh-M P-8GICh-M P-9GICh-M P-10GI
Ch-M P-11GICh-M P-12GICh-M P-13GICh-M P-14GICh-M P-15GICh-M P-16GICh-M P-17GICh-M P-18GICh-M P-19GICh-M P-20GICh-M P-21GICh-M P-22GICh-M P-23GICh-M P-24GICh-M P-25GICh-M P-26GICh-M P-1MCCh-M P-2MCCh-M P-3MCCh-M P-4MCCh-M P-5MCCh-M P-6MCCh-M P-7MCCh-M P-8MCCh-M P-9MCCh-M P-10MCCh-M P-1RECh-M P-2RECh-M P-3RECh-M P-4RECh-M P-5RECh-M P-6RECh-M P-7RECh-M P-8RECh-M P-9RECh-M P-10RECh-M P-11RECh-M P-12RECh-M P-13RECh-M P-14RECh-M P-1ECh-M P-2ECh-M P-3ECh-M P-4ECh-M P-5ECh-M P-6ECh-M P-7ECh-M P-8ECh-M P-9ECh-M P-10ECh-M P-11ECh-M P-12ECh-M P-13ECh-M P-14ECh-M P-1PCh-M P-2PCh-M P-3PCh-M P-4PCh-M P-5PCh-M P-6PCh-M P-7PCh-M P-8PCh-M P-9PCh-M P-10PCh-M P-11PCh-M P-12PCh-M P-13PCh-M P-14PCh-M P-15PCh-M P-16PCh-M P-17PCh-M P-18PCh-M P-19PCh-M P-1CCh-M P-2CCh-M P-3CCh-M P-4CCh-M P-5C

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