sess16&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
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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
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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: PV = FV (PVF n, i ) PV = $2,457,828 (PVF 9, 10% ) PV = $2,457,828 (.42410) PV = $1,042,365* *$5 difference due to rounding.
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sess16&17req - UNIVERSITY OF SOUTHERN MAINE SCHOOL...

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