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chap6soln[1]

# chap6soln[1] - EXERCISE612(1015minutes BuildingAPV=\$600,000...

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EXERCISE 6-12 (10–15 minutes) Building A—PV = \$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 6-13 (15–20 minutes) Time diagram: Lance Armstrong, Inc. PV = ?    i = 5% PV–OA = ?  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: PV–OA = R (PVF–OA n, i ) PV–OA = \$110,000 (PVF–OA 30, 5% ) PV–OA = \$110,000 (15.37245) PV–OA = \$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 6-14 (15–20 minutes)

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Time diagram: i = 8%       R =      PV–OA = ?      \$700,000                  \$700,000   \$700,000          0           1           2                        15         16                       24         25    n = 15                              n = 10 Formula: PV–OA = R (PVF–OA n, i ) PV–OA = \$700,000 (PVF–OA 25–15, 8% ) PV–OA = \$700,000 (10.67478 – 8.55948) PV–OA = \$700,000 (2.11530) PV–OA = \$1,480,710 OR Time diagram: i = 8%        R =      PV–OA = ?      \$700,000                  \$700,000   \$700,000
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