Question

On January 1, 2017, Shannon Company completed the following transactions (assume a 10 percent annual interest rate): Use Table 9C.1, Table 9C.2 (Round time value factor to 4 decimal places. Round intermediate and final answers to the nearest whole dollar.) a. Bought a delivery truck and agreed to pay $40,000 at the end of five years. b. Rented an office building and was given the option of paying $8,500 at the end of each of the next five years or paying $35,000 immediately. c. Established a savings account by depositing a single amount that will increase to $85,000 at the end of seven years. d. Decided to deposit a single sum in the bank that will provide 10 equal annual year-end payments of $50,000 to a retired employee (payments starting December 31, 2017). Required: 1. In (a), what is the cost of the truck that should be recorded at the time of purchase? Cost of the truck 2. In (b), which option for the office building should the company select? O Pay 8,500 at the end of the next five years O Pay 35,000 immediately 3. In (c), what single amount must be deposited in this account on January 1, 2017? Single amount 4. In (d), what single sum must be deposited in the bank on January 1, 2017? Single sum

Answer 1

Solution -

1. Cost of the truck = $40,000 × 0.62092 = $24,836  

2. $8500 × 3.79078 = $32,222. The present value of the five installments is less than paying the $33,000 immediately.

3. Amount to deposit = $85,000 × 0.51316 = $43,618  

4. Amount to deposit = $50,000 × 6.14457 = $307,228

Note - kindly refer to the Present value for easy understanding.