# Midterm - 2 - Accounting 100 A Midterm 2 Ankita Shah...

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Accounting 100 A - Midterm # 2 Ankita Shah QUESTION: 1 - ( a ) Interest compounded annually - Future value of 1 @ 10% for 6 years……………. . 1.77156 x \$30,000 \$53,146.80 ( b ) PV - AD = ? i = 8% R = \$50,000 \$50,000 \$50,000 \$50,000 \$50,000 0 1 2 19 20 n = 20 PV - AD = \$50,000 (9.81815) PV - AD = \$490,907.50 ( c ) Here we have to comapre the present value in both cases: 1. = \$1,200 (.85734) = \$1,028.81 Alternative 1, total present value is \$1,528.81 (\$500 (due now) + \$1,028.81) 2. = \$2,000 (.79383) = \$1,587.66 Alternative 2, Present value is \$1,587.66 Accumulated amt at the end of 6 yrs @ 10% (compund interest) of \$30,000 investment………. . PV - AD = \$50,000 (PVF - AD 20, 8% ) Thus, Tom has to deposit \$490,907.50 on December 31, 2004 to be able to withdraw \$50,000 every year for 20 years, invested @ 8%. Present Value = FV (PVF n, i ) = \$1,200 (PVF 2, 8% ) Present Value = FV (PVF n, i ) = \$2,000 (PVF 3, 8% ) She should choose the first alternate as the present value of money is \$ 1528.81, less than the second case of \$1587.66

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QUESTION: 2 - ( a ) Time Diagram: PV - OA = ? i = 8% R = 2,500 2,500 2,500 2,500 2,500 0 1 2 3 9 10 n = 10 yrs PV - OA = \$2,500 (6.71008) ( b ) Time Diagram: PV - AD = \$16,775.20 i = 8% R = ? ? ? ? ? 0 1 2 9 10 n = 10 yrs \$16,775.20 / 7.24689 = \$2,314.81 QUESTION: 3 - Option 1 - Buyer A buys land for \$385,000 now. PV - OA = R (PVF - OA n, i ) PV - OA = \$2,500 (PVF - OA 10, 8% ) PV - OA = \$16,775.20 The original cost of computer to Stark Office Equipment is \$16,775.20 \$16,775.20 = Payment (PV - AD 10, 8% ) \$16,775.20 / (PV - AD 10, 8% ) = Payment Thus, the amount of each payment would be \$2,314.81 if the ten annual payments are to be made at the beginning of each period.
Option 2 - Buyer B Time Diagram: PV = ? i = 9% R = \$60,000 60,000 60,000 60,000 0 1 2 3 4 5 17 18 19 n = 5 n = 20 1. Each periodic rent \$60,000.00 9.82 -3.89 4. Difference x 5.93 5. Present value of 20 rents of \$60,000 deferred for 5 periods \$355,975.80 QUESTION: 4 - Lease A: PV of an ordinary annuity of \$10,000 for five periods at? Percent. \$39,927 = PV of ordinary annuity for fiver periods at? percent \$10,000 3.9927 = PV of ordinary annuity for five periods at ?. . 3.9927 = 8% Therfore, the implied interest rate for Lease A is 8%. Lease B: PV of an annuity due of \$15,000 for five periods at? Percent. \$63,596 = PV of annuity due for fiver periods at? percent \$15,000 4.23973 = PV of annity due doe five periods at ?. . 4.23973 = 9% Thus, the implied interest rate for Lease B is 9%. QUESTION: 5 - Int. rate - 5% (10% / 2) Periods - 10 (5 yrs x 2) 2. Present value of an ordinary annuity of 1 for total of periods (25) [number of rents (20) plus number of deferred periods (5)] at 9% 3. Less: Present value of an ordinary annuity of 1 for the number of deferred periods (5) at 9% Therefore, Dolan should sell the land to Buyer A, as his payment of \$385,000 is higher than the Buyer B, who ends up paying only \$355,957.80 as interest is payable semiannually

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Present value of \$500,000 discounted for 10 periods at 5% (\$500,000 x .61391)
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Midterm - 2 - Accounting 100 A Midterm 2 Ankita Shah...

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