I have arrived at the answers for the questions below but I am not entirely sure if they are correct. The math works out but these questions appear to be trick questions because they list a lot of irrelavant information and i am not confident on my answers. can anyone help verify and confirm?
Use the following 8% interest factors
Present Value ofFuture Value of
Ordinary AnnuityOrdinary Annuity
What amount should be recorded as the cost of a machine purchased December 31, 2006, which is to be financed by making 8 annual payments of $6,000 each beginning December 31, 2007? The applicable interest rate is 8%.
ANS: I simply calculated the
present value of an ordinary annuity = R x (PVF-OA at 8 periods, 8 %)
= 6000 x 5.7466
So i think d) is the answer. However, I have no idea why they list amounts for 7 and 9 periods and the Future value of Ordinary Annuity.
Find the present value of an investment in plant and equipment if it is expected to provide annual earnings of $21,000 for 15 years and to have a resale value of $40,000 at the end of that period. Assume a 10% rate and earnings at year end. The present value of 1 at 10% for 15 periods is .23939. The present value of an ordinary annuity at 10% for 15 periods is 7.60608. The future value of 1 at 10% for 15 periods is 4.17725.
Again, I am not sure what information i should be using... but i simply used the present value equation with R = 21,000.
present value = R x (PVF-OA, at 15 periods @ 10%)
= 21,000 x 7.60608
= a) 159,728
However, I am curious as to why this problem gives us a resale value of 40,000. Does that play into the factor of solving this problem???
Thanks for the links but I already know how the calculate the present and future value. The question itself also provides the figures. I am more concerned about how to approach the problem with this given information.
As for depreciation, there is no depreciation method listed in the question so I don't think that is relevant.
I think for question 1, they just give you the extraneous info to see if you are paying attention.
For Q2, the answer is B. Resale value is part of your income stream. Discount the 40,000 @ 10% back 15 years = 40,000/4.177248169. Add that to your original answer and you will get B.
That was the key was knowing the discount of the resale value as you pointed out:
"Discount the 40,000 @ 10% back 15 years = 40,000/4.177248169"
*So if I am understanding this correctly, if we want to find the present value of an item, we would ALWAYS divide it by its "Future Value" for that given period of time?
Thank you so much for your help.