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Chapter 06 Solution

# Chapter 06 Solution - Exercise 6-9 1 Choose the option with...

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Exercise 6-9 1. Choose the option with the highest present value. (1) PV = \$64,000 (2) PV = \$20,000 + \$8,000 (4.91732) Present value of an ordinary annuity of \$1: n=6, i=6% (from Table 4) PV = \$20,000 + \$39,339 = \$59,339 (3) PV = \$13,000 (4.91732) = \$63,925 Alex should choose option (1). 2. FVA = \$200,000 (13.8164) = \$2,763,280 Future value of an ordinary annuity of \$1: n=10, i=7% (from Table 3) Exercise 6-12 PV = \$75,000 (.82645) = \$61,984 = Note/revenue Present value of \$1: n=2, i=10% (from Table 2) Exercise 6-15 PVA = \$10,000 x 4.35526= \$43,553 P resent value of an ordinary annui ty of \$1: n=6 , i= 10% (from Table 4 ) PV = \$43,553 x .82645= \$35,994 P r esent value of \$1: n=2 , i= 10% (from Table 2 ) Or alternatively: From Table 4, PVA factor, n=8, i=10% = 5.33493 PVA factor, n=2, i=10% = 1.73554 = PV factor for deferred annuity = 3.59939 PV = \$10,000 x 3.59939 = \$35,994 1

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Problem 6-3 The restaurant should be purchased if the present value of the future cash flows discounted at 10% rate is greater than \$800,000. PV = \$80,000 (4.35526) + 70,000 (.51316) + 60,000 (.46651**) n=7 n=8 + \$50,000 (.42410**) + 40,000 (.38554**) + 800,000 (.38554**) n=9 n=10 n=10 P resent value of an ordinary annuity of \$1: n=6, i=10% (from Table 4 ) P resent value of \$1:, i=10% (from Table 2 ) PV = \$757,392 < \$800,000 Since the PV is less than \$800,000, the restaurant should not be purchased. Problem 6-4 Choose the option with the lowest present value of cash payments.
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