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Unformatted text preview: Chapter 6: Accounting and the Time Value of Money BE611 Leon Tyler’s VI SA balance is $793.15. He may pay it off in 12 equal end of month payments of $75 each. What interest rate is Mark paying. BE611 1 2 3 18 75 75 PV=793.15 793.15=75*PVaoa(12, i) 10.575=PVaoa(12,i) (p.314) i=2% BE612 Maria Alvarez is investing $300,000 in a fund that earns 8% interest compounded annually. What equal amounts can Maria withdraw at the end of each of the next 20 years? BE612 1 2 3 20 R=? R=? R=? PV=200,000 300,000=R*PVaoa(8%,20) 300,000=R*9.81815 (p.314) 30,556 =R BE616 Zach Taylor is settling a $20,000 loan due today by making 6 equal annual payments of $4,727.53. Determine the interest rate on this loan, if the payments begin one year after the loan is signed. BE616 1 2 3 6 4,727.53 PV=20,000 20,000=4,727.53PVaoa(6,i) 4.2305=PVaoa(6,i) (p.314) i=11% BE617 Consider the loan in BE616. What payments must Zach Taylor make to settle the loan at the same interest rate but with the 6 payments beginning on the day the loan is signed? BE617 1 2 3 6 PV=20,000 20,000=R*PVaad(12%,6) (p.310) 20,000=R*4.60478 R=4343.31 Two Cash Flows: • Periodic interest payments (annuity). • Principal paid at maturity (singlesum). Bonds current market value is the combined present values of the both cash flows. Valuation of LongTer m Bonds 1 2 3 4 9 10 140,000 140,000 140,000 $140,000 . . . . . 140,000 140,000 2,000,000 BE615 Clancy I nc. issues $2,000,000 of 7% bonds due in 10 years with interest payable at yearend. The current market rate of interest for bonds is 8%. What amount will Arcadian receive when it issues the bonds? 1 Present Value 2 3 4 9 10 140,000 140,000 140,000 $140,000 . . . . . 140,000 Valuation of LongTer m Bonds 2,140,000 Number of Discount Rate Periods 4% 6% 8% 10% 12% 1 0.96154 0.94340 0.92593 0.90900 0.89286 5 4.45183 4.21236 3.99271 3.79079 3.60478 10 8.11090 7.36009 6.71008 6.14457 5.65022 15 11.11839 9.71225 8.55948 7.60608 6.81086 20 13.59033 11.46992 9.81815 8.51356 7.46944 Table 64 Table 64 $140,000 x 6.71008 = $939,411 I nterest Payment Factor Present Value PV of I nterest Valuation of LongTer m Bonds Number...
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This note was uploaded on 12/29/2009 for the course ACC 5100 taught by Professor Andrews during the Fall '09 term at Wayne State University.
 Fall '09
 Andrews
 Financial Accounting

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