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Answer the following questions.

(a) On May 1, 2012, Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2012. What present value concept is appropriate for this situation?

(b) On June 1, 2012, Seymour Inc. purchased a new machine that it does not have to pay for until May 1, 2014. The total payment on May 1, 2014, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept?

(c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation?

(d) Jane Hoffman invests in a “jumbo”$200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?

Solution

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Answered 2 years ago
Answered 2 years ago

a.) Since the contract required equal payments with the first payment made at the beginning of the period, then the appropriate present value concept in this situation is the present value of an annuity due.

b.) The contract required a specific lump sum payment (single) at a future date but the unknown variable is the cost of the machine (present value and no interest), therefore the time value of money concept used for this is the present value of 1.

c.) Since the contract required equal payments with the first payment made at the beginning of the period and the unknown variable is the future value of the investment, then the appropriate present value concept in this situation is the future value of an annuity due.

d.) Since Hoffman is looking for an amount on a future date with a single payment/investment today, then the table to be used is the future value of 1.

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