Question

On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) 1. Bought a delivery truck and agreed to pay $60,800 at the end of three years. 2. Rented an office building and was given the option of paying $10,800 at the end of each of the next three years or paying $28,800 immediately. 3. Established a savings account by depositing a single amount that will increase to $91,600 at the end of seven years. 4. Decided to deposit a single sum in the bank that will provide 8 equal annual year-end payments of $40,800 to a retired employee (payments starting December 31 of this year). Required: 1. What is the cost of the truck that should be recorded at the time of purchase? (Round your answer to nearest whole dollar.) Cost of the truck 2. Which option for the office building results in the lowest present value? O Pay in three installments O Pay in single installment 3. What single amount must be deposited in this account on January 1 of this year? (Round your answer to nearest whole dollar.) Amount to deposit

Answer 1

ANSWER:

Solution 1:

Cost of truck = Present value of future payments = $60,800 * PV factor at 8% for 3rd period

= $60,800 * 0.79383 = $48,265

Solution 2:

Present value of 3 installments = $10,800 * Cumulative PV factor at 8% for 3 periods

= $10,800 * 2.57710 = $27,833

Present value of single installment = $28,800

Therefore "Pay in three installments" results in lowest present value.

Solution 3:

Future value = $91,600

Single deposit amount = $91,600* PV factor at 8% for 7th period

= $91,600* 0.58349 = $53,448

Solution 4:

Single amount to be deposited in bank on Jan 1 of this year = $40,800 * cumulative PV factor at 8% for 8 periods

= $40,800 * 5.74664

= $234,463

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