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sess16&amp;17req

# sess16&amp;17req - UNIVERSITY OF SOUTHERN MAINE SCHOOL...

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UNIVERSITY OF SOUTHERN MAINE SCHOOL OF BUSINESS ACC301 - FINANCIAL REPORTING I Fall 2011 Session 16 & 17 Required Problems E 6-20 Expected Cash Flow Probability Cash Estimate X Assessment = Flow (a) \$ 4,800 20% \$ 960 6,300 50% 3,150 7,500 30% 2,250 Total Expected Value \$ 6,360 (b) \$ 5,400 30% \$ 1,620 7,200 50% 3,600 8,400 20% 1,680 Total Expected Value \$ 6,900 (c) \$ (1,000) 10% \$ (100) 3,000 80% 2,400 5,000 10% 500

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Total Expected Value \$ 2,800 P 6-6 Time diagram: i = 12% PV – OA = ? R = (\$39,000) (\$39,000) \$18,000 \$18,000 \$68,000 \$68,000 \$68,000 \$68,000 \$38,000 \$38,000 \$38,000 0 1 5 6 10 11 12 29 30 31 39 40 n = 5 n = 5 n = 20 n = 10 (0 – \$30,000 – \$9,000) (\$60,000 – \$30,000 – \$12,000) (\$110,000 – \$30,000 – \$12,000) (\$80,000 – \$30,000 – \$12,000) Formulas: PV – OA = R (PVF – OA n, i ) PV – OA = R (PVF – OA n, i ) PV – OA = R (PVF – OA n, i ) PV – OA =R (PVF – OA n, i ) PV – OA = (\$39,000)(PVF – OA 5, 12% ) PV – OA = \$18,000 (PVF – OA 10-5, 12% ) PV – OA = \$68,000 (PVF – OA 30– 10, 12% ) PV – OA = \$38,000 (PVF – OA 40– 30, 12% ) PV – OA = (\$39,000)(3.60478) PV – OA = \$18,000 (5.65022 – 3.60478) PV – OA = \$68,000 (8.05518 – 5.65022) PV – OA = \$38,000 (8.24378 – 8.05518) PV – OA = (\$140,586.42) PV – OA = \$18,000 (2.04544) PV – OA = \$68,000 (2.40496) PV – OA = \$38,000 (.18860) PV – OA = \$36,818 PV – OA = \$163,537 PV – OA = \$7,167 Present value of future net cash inflows: \$(140,586.42) 36,817.92
163,537.28 7,166.80 \$ 66,936 Stacy McGill should accept no less than \$66,935.58 for her vineyard business. P 6-9 (a) Time diagram for the first ten payments: i = 10% PV–AD = ? R = \$800,000 \$800,000 \$800,000 \$800,000 \$800,000 \$800,000 \$800,000 0 1 2 3 7 8 9 10 n = 10 Formula for the first ten payments: PV – AD = R (PVF – AD n, i ) PV – AD = \$800,000 (PVF – AD 10, 10% ) PV – AD = \$800,000 (6.75902) PV – AD = \$5,407,216

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Formula for the last ten payments: PV – OA = R (PVF – OA n, i ) PV – OA = \$400,000 (PVF – OA 19 – 9, 10% ) PV – OA = \$400,000 (8.36492 – 5.75902) PV – OA = \$400,000 (2.6059) PV – OA = \$1,042,360 Note: The present value of an ordinary annuity is used here, not the present value of an annuity due. The total cost for leasing the facilities is: \$5,407,216 + \$1,042,360 = \$6,449,576. OR Time diagram for the last ten payments: i = 10% PV = ? R = \$400,000 \$400,000 \$400,000 \$400,000 0 1 2 9 10 17 18 19
FVF (PVF n, i ) R (PVF – OA n, i ) Formulas for the last ten payments: (i) Present value of the last ten payments: PV – OA = R (PVF – OA n, i ) PV – OA = \$400,000 (PVF – OA 10, 10% ) PV – OA = \$400,000 (6.14457) PV – OA = \$2,457,828 (ii) Present value of the last ten payments at the beginning of current year:

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