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# Answer the remaining life of the bond is 12 20 8

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Answer : The remaining life of the bond is 12 (= 20 – 8) years. The semi-annual receipts amount to (0.07/2)(5,000) = 175 Rs. There are 24 semi-annual payments.

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The amount of Rs. 5,000 will be received at the end of 12 years. So 3,800 = (175)(P/A, r %, 24) + (5,000)(P/F, r %, 24) Taking r = 5%, (175)(P/A, r %, 24) + (5,000)(P/F, r %, 24) = 3,965.25 Taking r = 6%, (175)(P/A, r %, 24) + (5,000)(P/F, r %, 24) = 3,431.25 Interpolating (175)(P/A, r %, 24) + (5,000)(P/F, r %, 24) = 3,800 at r = 5.30946% The effective annual interest rate = (1 + r ) 2 – 1 = 0.109 = 10.90 % Question 21– 24.4 What are the advantages and disadvantages of net present worth cost comparison method? Answer Net present worth cost comparison method has the following advantages: (1) It is simple. (2) It is applicable if the projects have the same life span. The method has the following disadvantages: (1) It is not applicable to projects with differing lives. Question 21– 24.5 Discuss where internal rate of return and the annual cost of comparison are used. Answer Internal rate of return is used when trying to find the economic feasibility of a single project. Annual cost of comparison is used while making an economic comparison of projects with differing lives. Question 21– 24.6 Find the effective annual interest rate if the annual interest rate is 10% compounded quarterly. Answer The effective annual interest rate is given by r e = (1 + r /4) 4 - 1 = (1 + 0.10/4) 4 - 1 = 0.10382 (10.382 % per year) Question 25 – 26.1 Which assets depreciate over time and why? Answer
Usually tangible assets (except land, rare paintings, etc.) age and their value decrease as time progresses. Depreciation occurs due to (1) physical depreciation, such as wear and tear and corrosion, (2) functional depreciation, such as decrease in productivity and obsolescence, and (3) minor accidents. Question 25 – 26.2 Why is depreciation accounting done? What is the philosophy underlying depreciation accounting? Answer Depreciation accounting is done to (1) estimate the loss of capital due to depreciation and recover the capital that is used up, (2) measure the value of an enterprise’s unexpended assets, (3) charge the cost of depreciation to products/services, (4) help pricing, and (5) compute tax. To account for depreciation of an asset in a year, the full purchase price of the asset is spread over its life and depreciation is charged to a particular year following one of the many popular depreciation accounting methods. Question 25 – 26.3 Name the common methods of depreciation accounting and state their characteristics. Answer The common methods of depreciation accounting and their characteristics are the following: - The Straight-Line method - The value of an asset decreases at a constant rate - Fixed-percentage (or Declining-Balance) Method - - Double-Declining-Balance Method - The value of an asset decreases at a decreasing rate. - Sum-of-the-Years-Digits Method - The value of an asset decreases at a decreasing rate. Question 25 – 26.4 Why is sinking-fund method of depreciation accounting not preferred in practice?

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