BProblemsChapter 8

# BProblemsChapter 8 - Problem 8-1 Time zero investment =...

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Problem 8-1 Time zero investment = \$750,000 x .630 = \$472,500 Proof \$472,500 x (1.08 x 1.08 x 1.08 x 1.08 x 1.08 x 1.08) = \$749,798 Difference due to use of tables (Table A) Problem 8-3 (1) Trust fund at time zero = \$100,000 x .397 = \$39,700 (2) End of Year 1 payment = \$4,000 x .926 = \$ 3,704 End of Year 2 payment = \$4,500 x .857 = \$ 3,857 End of Year 3 payment = \$5,000 x .794 = \$ 3,970 End of Year 5 payment = \$6,000 x .735 = \$ 4,410 Total loan \$15,941 (1) Present value of \$3,100 / year for three years at 6 percent (least amount you will accept today) = \$3,100 x 2.673 = \$8,286 Proof Year Beginning Balance Ending Balance Before Payment Payment 1 \$8,286 \$8,783 \$3,100 2 5,683 6,024 3,100 3 2,924 3,100 3,100 (4) Present value at beginning of year 3 of \$3,000 received annually for 9 years (assuming “through year 11” means to the end of year 11) discounted at 12 percent per year = \$3,000 x 5.328 = \$15,984. Present value of \$15,984 received two years hence, discounted at 12 percent = \$15,984 x .797 = \$12,739. Problem 8-4 Year Beginning Balance Ending Balance Before Payment Payment 1 \$164,440 \$184,173 40,000 2 144,173 161,473 40,000 3 121,473 136,050 40,000 4 96,050 107,576 40,000 5 67,576 75,685 40,000 6 35,685 39,967 39,967 Problem 8-5 (1) W&H Company’s 2006 financial statements should disclose the IRS suit, if material. The company should include in its 2006 financial statements a provision for a payment of at least \$270,000 to the

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IRS. (2) The full loss should be included in the company’s 2006 financial statements. (3) The suit should be disclosed in the 2006 financial statements, if material. A comment can be made that if an adverse finding is reached by the court, insurance should offset part of the damage payment.
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