Computing Present Values (AP9-6)
On January 1, 2011, Boston Company completed the following transactions (use a 7 percent annual interest rate for all transactions):
a. Borrowed $115,000 for seven years. Will pay $8,050 interest at the end of each year and repay the $115,000 at the end of the 7th year.
b. Established a plant addition fund of $490,000 to be available at the end of year 8. A single sum that will grow to $490,000 will be deposited on January 1, 2011.
c. Agreed to pay a severance package to a discharged employee. The company will pay $75,000 at the end of the first year, $112,500 at the end of the second year, and $150,000 at the end of the third year.
d. Purchased a $170.000 machine on January 1, 2011. and paid cash, $40,000. A five-year note payable is signed for the balance. The note will be paid in five equal year-end payments starting on December 31, 2011.
Required (show computations and round to the nearest dollar):
1. In transaction (a), determine the present value of the debt.
2. In transaction (b), what single sum amount must the company deposit on January 1, 2011? What is the total amount of interest revenue that will be earned?
3. In transaction (c), determine the present value of this obligation.
4. In transaction (d), what is the amount of each of the equal annual payments that will be paid on the note? What is the total amount of interest expense that will be incurred?
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