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Unformatted text preview: P6-7 (Time Value Concepts Applied to Solve Business Problems) Answer the following questions related to Derek Lee Inc.(a) Derek Lee Inc. has $572,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $80,000 at the end of each year for 12 years, and the other is to receive a single lump sum payment of $1,900,000 at the end of the 12 years. Which alternative should Lee select? Assume the interest rate is constant over the entire investment.Option 1: 80,000 per year for 12 years572,000 = 80,000 PVIFA (12, r %)PVIFA (12, r %) = 572,000/80,000 = 7.15Looking in the PVIFA table under 12 years, the factor is 7.161 under 9%. The interest rate in this option is approximately 9%.Option 2: 1,900,000 at the end of 12 years:572,000 = 1,900,000 PVIF (12, r %)PVIF = 572,000/1,900,000 = 0.301Looking in the PVIF table under 12 years, 0.301 will be between 10% and 11%....
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- Spring '10