Week 4 Assignment.docx

# Week 4 Assignment.docx - Teia Wadkins Week 4 Assignment...

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Teia Wadkins Week 4 Assignment E6-4 (Computation of Future Values and Present Values) Using the appropriate interest table, answer the following questions. (Each case is independent of the others). (a) What is the future value of 20 periodic payments of \$5,000 each made at the beginning of each period and compounded at 8%? Future Value of an ordinary annuity of \$5,000 a period for 20 periods at 8% \$228,809.80 (\$5,000 X 45.76196) Factor (1+.08) X 1.08 Future value of an annuity due of \$5,000 a period at 8% \$247,114.58 (b) What is the present value of \$2,500 to be received at the beginning of each of 30 periods, discounted at 10% compound interest? Present value of an ordinary Annuity of \$2,500 for 30 Periods at 10% \$23,567.28 (\$2,500 X 9.42691) Factor (1 + .10) X 1.10 Present value of annuity Due of \$2,500 for 30 periods At 10% \$25,924.01 (c) What is the future value of 15 deposits of \$2,000 each made at the beginning of each period and compounded at 10%? (Future value as of the end of the fifteenth period.) Future value of an ordinary Annuity of \$2,000 a period For 15 periods at 10% \$63,544.96 (\$2,000 X 31.77248) Factor (1 + .10) X 1.10 Future value of an annuity Due of \$2,000 a period For 15 periods at 10% \$69,899.46 (d) What is the present value of six receipts of \$3,000 each received at the beginning of each period, discounted at 9% compounded interest? Present value of an ordinary Annuity of \$3,000 for 6

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Periods at 9% \$13,457.76 (\$3,000 X 4.48592) Factor (1 +.09) X 1.09 Present value of an annuity Date of \$3,000 for 6 periods at 9% \$14,668.96 P6-6 (Purchase Price of a Business) During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for \$30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Stacy estimates that the vines will bear grapes that can be sold for \$60,000 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of \$110,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to \$80,000 per year. During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at \$9,000; during the years of production, 6–40, these costs will rise to \$12,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year. Instructions Dick Button has offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept? 30,000 + 9000 = 39,000 39,000 x (3.60478) = (140,586.42) 60,000 - 30,000 - 12,000 = 18,000 18,000 x (5.65022-3.60478) = 36,817.92 110,000- 30,000 - 12,00 0= 68,000 68,000 x (8.24378-8.05518) = 7,166.80 (-140,586.42) + 36,817.92 + 163,537.28 +7,166.80 Minimum amount she should accept is \$66,935.58 P6-10 (Analysis of Lease vs. Purchase) Dunn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities.
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