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Unformatted text preview: EXERCISE 612 (1015 minutes) Building APV = $600,000. Building B Rent X (PV of annuity due of 25 periods at 12%) = PV $69,000 X 8.78432 = PV $606,118.08 = PV Building C Rent X (PV of ordinary annuity of 25 periods at 12%) = PV $7,000 X 7.84314 = PV $54,901.98 = PV Cash purchase price $650,000.00 PV of rental income 54,901.98 Net present value $595,098.02 Answer : Lease Building C since the present value of its net cost is the smallest. EXERCISE 613 (1520 minutes) Time diagram: Lance Armstrong, Inc. PV = ? i = 5% PVOA = ? Principal $2,000,000 interest $110,000 $110,000 $110,000 $110,000 $110,000 $110,000 0 1 2 3 28 29 30 n = 30 Formula for the interest payments: PVOA = R (PVFOA n, i ) PVOA = $110,000 (PVFOA 30, 5% ) PVOA = $110,000 (15.37245) PVOA = $1,690,970 Formula for the principal: PV = FV (PVF n, i ) PV = $2,000,000 (PVF 30, 5% ) PV = $2,000,000 (0.23138) PV = $462,760 The selling price of the bonds = $1,690,970 + $462,760 = $2,153,730. EXERCISE 614 (1520 minutes) Time diagram: i = 8% R = PVOA = ? $700,000 $700,000 $700,000 0 1 2 15 16 24 25 n = 15 n = 10 Formula: PVOA = R (PVFOA n, i ) PVOA = $700,000 (PVFOA 2515, 8% ) PVOA = $700,000 (10.67478 8.55948) PVOA = $700,000 (2.11530) PVOA = $1,480,710 OR Time diagram: i = 8% R = PVOA = ? $700,000 $700,000 $700,000 0 1 2 15 16 24 25...
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This note was uploaded on 08/31/2010 for the course AEM 3360 at Cornell University (Engineering School).
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 PROF.LIPPITT

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