Question

8. ABC Company has a loan that requires a single payment of $5,000 at the end of 5 years. The loan's interest rate is 8%, compounded semiannually. How much did ABC Company borrow?

9.

Information about an equipment purchase is given below:

Cost	$	159,200
Salvage value	$	4,800
Estimated useful life		4	years
Annual net cash flows	$	46,900
Depreciation method	Straight-line

What is the annual average investment amount that should be used to calculate the accounting rate of return (ARR)?

Answer 1

Solution to QUESTION-8

The amount to be borrowed by ABC Company

The amount to be borrowed by ABC Company = Future Value / [1 + (r/2)]5*2

= $5,000 / [1 + (0.08/2)]5*2

= $5,000 / [1 + 0.04]10

= $5,000 / [1 + 0.04]10

= $5,000 / 1.480244285

= $3,377.82

Solution to QUESTION-9

The annual average investment amount that should be used to calculate the accounting rate of return (ARR)

The annual average investment = [Cost + Salvage Value] / 2

= [$159,200 + $4,800] / 2

= $164,000 / 2

= $82,000