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