Question

On January 1 of this year, Shannon Company completed the following transactions (assume a 8% annual interest rate): (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) 1. Bought a delivery truck and agreed to pay $61,400 at the end of three years. 2. Rented an office building and was given the option of paying $11,400 at the end of each of the next three years or paying $30,000 immediately. 3. Established a savings account by depositing a single amount that will increase to $92,800 at the end of seven years. 4. Decided to deposit a single sum in the bank that will provide 8 equal annual year-end payments of $41,400 to a retired employee (payments starting December 31 of this year). Required: 1. What is the cost of the truck that should be recorded at the time of purchase? (Round your answer to nearest whole dollar.) Cost of the truck 2. Which option for the office building results in the lowest present value? Pay in single installment Pay in three installments 3. What single amount must be deposited in this account on January 1 of this year? (Round your answer to nearest whole dollar.) Amount to deposit

Answer 1

(1)

cost of the truck = $61400 x PVF(8%,3)

= $61400 x 0.79383

= $48741

where,

PVF(8%,3) = 0.79383

(2)

present value of annuity $11400 = $11400 x PVAF(8%,3)

= $11400 x 2.57710

= $29379

where,

PVAF(8%,3) = 2.57710

and, present value of immediate payment = $30000 x 1 = $30000

therefore,

The option of having lowest present value = pay in three installments

(3)

single amount to be deposited = future value/FVF(8%,7)

= $92800/1.71382

= $54148

where,

FVF(8%,7) = 1.71382