Question

question 1

corporation bought a new machine and agreed to pay for it in equal annual instalments of $5370 at the end of each of the next ten years. Assuming that a prevailing interest rate of 6% applies to this contract, how much should corporation record as the cost of machine?

question 2

corporation purchased a special tractor on december 31 2017. The purchase agreement stipulated corporation to pay $20940 at the time of purchase and %5320 at the end of the next 8 years. The tractor should be recorded on dec 31 2017 at what amount assuming appropriate interest rate of 12%?

question 3

corporation wants to withdraw $122920 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the funds earn 11%?

Answer #1

Question 1.

The cost of the machine to be recorded | 39524 * |

Working:

Annual payment | 5370 |

Period - years | 10 |

Rate of interest | 6% |

Discounting factor for an | 7.3601 |

annuity for 10 period @6% | |

Present value of the annual payment | 39523.74 * |

Question 2.

Cost of the tractor to be recorded * | 47368 |

Working:

Annual payment | 5320 |

Period - years | 8 |

Rate of interest | 12% |

Discounting factor for an | 4.9676 |

annuity for 8 periods @12% | |

Present value of the annual payment | 26428 |

Initial payment | 20940 |

Total value of the tractor * | 47368 |

Question 3. Initial investment to be made = $7,818.00

Formula for the future value of an annuity due is

FV = (1+r) X P X (((1+r)^n - 1)/r)

Here FV = 122,920 , r = 11% and n = 9 P = the annual amount to be saved.

Sloving this we get P = $7,818.

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