APPENDIX C

Present Value Concepts

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE C-1
1.

12%
10%
4%

6
15
24

2.

8%
10%
6%

20
5
8

BRIEF EXERCISE C-2

(a)

i = 8%
?

$30,000

Discount rate from Table 1 is .54027 (8 periods at 8%). Present value

of $30,000 to be received in 8 years discounted at 8% is therefore
$16,208.10 ($30,000 X .54027).

(b)

i = 9%
?

$30,000 $30,000 $30,000 $30,000 $30,000 $30,000

Discount rate from Table 2 is 4.48592 (6 periods at 9%). Present

value of 6 payments of $30,000 each discounted at 9% is therefore
$134,577.60 ($30,000 X 4.48592).

Appendix C-1

BRIEF EXERCISE C-3

i = 10%
?

$600,000

Discount rate from Table 1 is .62092 (5 periods at 10%). Present value of

$600,000 to be received in 5 years discounted at 10% is therefore $372,552
($600,000 X .62092). Ramirez Company should therefore invest $372,552
to have $600,000 in five years.

BRIEF EXERCISE C-4

i = 9%
?

$700,000

Discount rate from Table 1 is .50187 (8 periods at 9%). Present value of

$700,000 to be received in 8 years discounted at 9% is therefore $351,309
($700,000 X .50187). LaRussa Company should invest $351,309 to have
$700,000 in eight years.

BRIEF EXERCISE C-5

i = 10%
?

$36,000

Discount rate from Table 1 is .68301 (4 periods at 10%). Present value of

$36,000 to be received in 4 years discounted at 10% is therefore $24,588.36
($36,000 X .68301). Polley should receive $24,588.36 upon the sale of the note.

Appendix C-2

BRIEF EXERCISE C-6

i = 8%
?

$60,000

Discount rate from Table 1 is .79383 (3 periods at 8%). Present value of

$60,000 to be received in 3 years discounted at 8% is therefore $47,629.80
($60,000 X .79383). Marichal Company should receive $47,629.80 upon issuance of the zero-interest bearing note.

BRIEF EXERCISE C-7

i = 6%
?

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000

14

15

Discount rate from Table 2 is 9.71225. Present value of 15 payments of

$40,000 each discounted at 6% is therefore $388,490 ($40,000 X 9.71225).
Colaw Company should pay $388,490 for this annuity contract.

BRIEF EXERCISE C-8

i = 11%
?

$100,000 $100,000 $100,000 $100,000

Discount rate from Table 2 is 3.10245. Present value of 4 payments of

$100,000 each discounted at 11% is therefore $310,245 ($100,000 X 3.10245).
Sauder Enterprises invested $310,245 to earn $100,000 per year for four years.

Appendix C-3

BRIEF EXERCISE C-9

i = 4%
?

$200,000

Diagram
for
Principal

19

20

i = 4%
?

$10,000 $10,000 $10,000 $10,000

$10,000 $10,000

Diagram
for
Interest

19

Present value of principal to be received at maturity:

$200,000 X 0.45639 (PV of $1 due in 20 periods
at 4% from Table 1) ......................................................................
Present value of interest to be received periodically
over the term of the bonds: $10,000 X 13.59033
(PV of $1 due each period for 20 periods at 4%
from Table 2) ..................................................................................
Present value of bonds........................................................................

20

$ 91,278.00

135,903.30
$227,181.30

BRIEF EXERCISE C-10

The bonds will sell at par or $200,000. This may be proven as follows:
Present value of principal to be received at maturity:
$200,000 X .37689 (PV of $1 due in 20 periods
at 5% from Table 1) ......................................................................
Present value of interest to be received periodically
over the term of the bonds: $10,000 X 12.46221
(PV of $1 due each period for 20 periods at 5%
from Table 2) ..................................................................................
Present value of bonds........................................................................
*Rounded.

Appendix C-4

$ 75,378*

124,622*
$200,000*

BRIEF EXERCISE C-11

i = 9%
?

$75,000

Diagram
for
Principal

i = 9%
?

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Diagram
for
Interest

Present value of principal to be received at maturity:

$75,000 X .59627 (PV of $1 due in 6 periods
at 9% from Table 1) .......................................................................
Present value of interest to be received annually
over the term of the note: $6,000 X 4.48592
(PV of $1 due each period for 6 periods at
9% from Table 2) ............................................................................
Present value of note received ..........................................................

Appendix C-5

$44,720.25

26,915.52
$71,635.77

BRIEF EXERCISE C-12

i = 5%
?

$1,000,000

Diagram
for
Principal

14

15

16

i = 5%
?

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000 $40,000

Diagram
for
Interest

14

15

16

Present value of principal to be received at maturity:

$1,000,000 X 0.45811 (PV of $1 due in 16 periods
at 5% from Table 1)...................................................................
Present value of interest to be received periodically
over the term of the bonds: $40,000 X 10.83777
(PV of $1 due each period for 16 periods at 5%
from Table 2)...............................................................................
Present value of bonds and cash proceeds ..................................

$458,110

433,511
$891,621

BRIEF EXERCISE C-13

i = 11%
?

$2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800

Discount rate from Table 2 is 5.14612. Present value of 8 payments of $2,800

each discounted at 11% is therefore $14,409.14 ($2,800 X 5.14612). Ricky
Cleland should not purchase the tire retreading machine because the present value of the future cash flows is less than the purchase price of the
retreading machine.

Appendix C-6

BRIEF EXERCISE C-14

i = 5%
?

$78,978

$78,978

$78,978

$78,978

$78,978

$78,978

11

12

Discount rate from Table 2 is 8.86325. Present value of 12 payments of

$78,978 each discounted at 5% is therefore $700.001.75 ($78,978 X 8.86325).
Martinez Company should receive $700,001.75 from the issuance of the note.

BRIEF EXERCISE C-15

i = 12%
?

$30,000

$40,000

$60,000

To determine the present value of the future cash flows, discount the future
cash flows at 12%, using Table 1.
Year 1 ($30,000 X .89286) =
Year 2 ($40,000 X .79719) =
Year 3 ($60,000 X .71178) =
Present value of future cash flows

$ 26,785.80
31,887.60
42,706.80
$101,380.20

To achieve a minimum rate of return of 12%, Durler Company should pay no

more than $101,380.20. If Durler pays less than $101,380.20 its rate of return
will be greater than 12%.

Appendix C-7

BRIEF EXERCISE C-16

i=?
$2,745

$10,000

14

15

Present value = Future amount X Present value of 1 Factor

$2,745 = $10,000 X .2745
The .2745 for 15 periods is found in the 9% column. Carla Garcia will receive a
9% return.

BRIEF EXERCISE C-17

i = 10%
$51,316

$100,000

n=?
Present value = Future amount X Present value of 1 Factor
$51,316 = $100,000 X .51316
The .51316 at 10% is found in the 7 years column. Sara Altom therefore
must wait 7 years to receive $100,000.

Appendix C-8

BRIEF EXERCISE C-18

i=?
?

$1,000 $1,000 $1,000 $1,000 $1,000 $1,000

$1,000 $1,000

19

20

$11,469.92

n = 20
Present value = Future amount X Present value of an annuity
$11,469.92 = $1,000 X 11.46992
The 11.46992 for 20 periods is found in the 6% column. Stacy Dains will
therefore earn a rate of return of 6%.

BRIEF EXERCISE C-19

i = 8%
$1,000 $1,000 $1,000 $1,000

$1,000 $1,000

$8,559.48
n=?
Present value = Future amount X Present value of an annuity
$8,559.48 = $1,000 X 8.55948
The 8.55948 at an interest rate of 8% is shown in the 15-year column. Diana
Rossi therefore will receive 15 payments.

Appendix C-9

BRIEF EXERCISE C-20

(a)
(b)
(c)
(d)

$10,000 X .79383 = $7,938.30.

$10,000 X .79031 = $7,903.10.
$10,000 X .71178 = $7,117.80.
$10,000 X .70496 = $7,049.60.

BRIEF EXERCISE C-21

(a)
(b)
(c)
(d)

$10,000 X .74726 = $7,472.60.

$10,000 X .83962 = $8.396.20.
$10,000 X .62092 = $6,209.20.
$10,000 X .75132 = $7,513.20.

BRIEF EXERCISE C-22

Option one has a present value of $39,500.
Option two has a present value of [$10,000 + ($8,000 X 3.79079)] = $40,326.32.
Choose option one (lower cost).

BRIEF EXERCISE C-23

(a)

$10,000 X 3.79079 = $37,907.90

(b) Receipt X 6.71008 = $50,000; Receipt = $50,000/6.71008 = $7,451.48

(c)

$11,971 X Factor = $70,000; Factor = $70,000/$11,971 = 5.84746;

5.84746 is approximately the factor for 15 years, 15%

BRIEF EXERCISE C-24

Present value of $5,000 option: $5,000 X 6.71008 = $33,550.
Present value of $9,000 option: $9,000 X 3.99271 = $35,934.
Present value of $30,000 option: $30,000.
Select the $9,000 option (highest present value).

Appendix C-10

BRIEF EXERCISE C-25

$24,000 cost $2,400 down payment = $21,600.
Payment X 7.36009 = $21,600.
Payment = $21,600/7.36009 = $2,934.75

BRIEF EXERCISE C-26

(a)

$40,000 X .62741 =
2,000 X 6.20979 =

$25,096
12,420
$37,516

(b) $40,000 X .73069 =

2,000 X 6.73274 =

$29,228
13,465
$42,693

BRIEF EXERCISE C-27

(a)

$90,000 X .55684 =
4,050 X 8.86325 =

$50,116
35,896
$86,012

(b) $90,000 X .62460 =

4,050 X 9.38507 =

$56,214
38,010
$94,224

Appendix C-11