Calculate present and future values. 10-15 min.
Presented next are four independent situations related to future and present values.
Requirement
1. Using the tables in the appendix, calculate the future or present value of each item as needed
- a. $8,000 is deposited in the bank today for a period of six years. Calculate the value of the $8,000 at the end of six years assuming it earns 7 percent interest
- b. How much must you invest today in order to receive $3,000 at the end of each year for the next four years assuming you can earn 12 percent interest?
- c. $4,500 will be invested at the end of each year for a period of three years. Calculate the value of the investment at the end of three years assuming it earns 10 percent interest.
- d. The company you work for wants to purchase a new piece of equipment that is estimated to cost $29,000 ten years from now. How much must they invest today in order to have the $29,000 necessary to purchase the equipment if they can earn 6 percent interest?
Calculate the present value and the future value for each item.
Explanation of Solution
Time value of money:
Time value of money refers to the concept that the value of money available at present worth more in the future due to its potential earning capacity.
Present Value:
Present value refers to the current value of future sum of money in lump sum or in instalments with a stated rate of interest.
Future value:
The future value is value of present amount compounded at an interest rate until a particular future date.
a.
Calculate the future value for the following transaction.
Therefore, the value of the $8,000 at the end of 6 years is $12,008.
Working Note:
Calculate the future value factor:
b.
Calculate the present value of annuity for the following transaction.
Therefore, the amount of $9,111 must be invested today in order to receive $3,000 at the end of each year for the next four years.
Working note:
Calculate the present value of annuity factor:
c.
Calculate the future value of annuity for the following transaction.
Therefore, the value of the investment at the end of three years is $14,895.
Working Note:
Calculate the future value of annuity factor:
d.
Calculate the present value for the following transaction.
Therefore, the company must invest an amount of $16,182 at present in order to have the $29,000 amount to purchase the equipment.
Working note:
Calculate the present value of annuity factor:
Want to see more full solutions like this?
Chapter B Solutions
Financial Accounting, Student Value Edition (5th Edition)
- Refer to the present value table information on the previous page. What amount should Brett have in his bank account today, before withdrawal, if he needs 2,000 each year for 4 years, with the first withdrawal to be made today and each subsequent withdrawal at 1-year intervals? (Brett is to have exactly a zero balance in his bank account after the fourth withdrawal.) a. 2,000 + (2,000 0.926) + (2,000 0. 857) + (2,000 0.794) b. 2,0000.7354 c. (2,000 0.926) + (2,000 0.857) + (2,000 0.794) + (2,000 0.735) d. 2,0000.9264arrow_forwardNext Level Potter wishes to deposit a sum that at 12% interest, compounded semiannually, will permit 2 withdrawals: 40,000 at the end of 4 years and 50,000 at the end of 10 years. Analyze the problem to determine the required deposit, stating the procedure to follow and the tables to use in developing the solution.arrow_forwardUse the tables in Appendix B to answer the following questions. A. If you would like to accumulate $4,200 over the next 6 years when the interest rate is 8%, how much do you need to deposit in the account? B. If you place $8,700 in a savings account, how much will you have at the end of 12 years with an interest rate of 8%? C. You invest $2,000 per year, at the end of the year, for 20 years at 10% interest. How much will you have at the end of 20 years? D. You win the lottery and can either receive $500,000 as a lump sum or $60,000 per year for 20 years. Assuming you can earn 3% interest, which do you recommend and why?arrow_forward
- Use the tables in Appendix B to answer the following questions. A. If you would like to accumulate $2,500 over the next 4 years when the interest rate is 15%, how much do you need to deposit in the account? B. If you place $6,200 in a savings account, how much will you have at the end of 7 years with a 12% interest rate? C. You invest $8,000 per year for 10 years at 12% interest, how much will you have at the end of 10 years? D. You win the lottery and can either receive $750,000 as a lump sum or $50,000 per year for 20 years. Assuming you can earn 8% interest, which do you recommend and why?arrow_forwardUse Future Value and Present Value Tables to Apply Compound Interest to Accounting Transactions Kristen Quinn makes equal deposits of $500 semiannually for 4 years. Required: What is the future value at 8%? (Note: Round answers to two decimal places.)arrow_forwardRefer to the present value table information on the previous page. If Kathleen put 3,000 in a savings account today, what amount of cash will be available 2 years from today? a. 3,000 0.857 b. 3,000 0.857 2 3,000 c. 4,000 0.681 0926 d. cannot be determined from the information givenarrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
- Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning