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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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Next Level Potter wishes to deposit a sum that at 12% interest, compounded semiannually, will permit 2 withdrawals: $40,000 at the end of 4 years and $50,000 at the end of 10 years. Analyze the problem to determine the required deposit, stating the procedure to follow and the tables to use in developing the solution.

To determine

Compute the amount of deposit required.

Explanation

Present value of a single sum:

Present value of a single sum is the today’s amount of future value of a single sum discounted at a rate of interest till particular current date.

 In order to calculate the required deposit, the present value of both the permitted withdrawals at different period has to be calculated using the present value of $1 table.

First, calculate present value of $40,000 that can be withdrawn at the end of 4 years.

Future value –$40,000

Interest rate (i) – 6% per semi-annum (12% per annum2)

Number of period (n) – 8semi-annum(4 years×2)

Factor 0.627412 is taken from the Present value of $1 table (Table 3 at the end of the time value money module), where n=8, i=6%.

 Present value=Future value×(pn=8,i=6%)=$40,000×0.627412=$25,096.48

Now, calculate present value of $50,000 that can be withdrawn at the end of 10 years.

Future value –$50,000

Interest rate (i) – 6% per semi-annum (12% per annum2)

Number of period (n) – 20semi-annum(10years×2)

Factor 0

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