Question

Problem 1 Computing Present Values

On January 1, 2014, Boston Company completed the following transactions (use a 7 percent annual interest rate for all transactions):

a) Borrowed $115,000 for seven years. Will pay $6,000 interest at the end of each year and repay the $115,000 at the end of the 7th year.

Determine present value of debt.

b) Boston Company determined that the company needs to replace some of its long term assets in 8 years. The company estimated that it will need $490,000 in 8 years. Boston wants to deposit a single sum to this FUND now so it would grow up to $490,000 in 8 years.

How much money does it need to deposit this Fund today?

What is the total amount of interest revenue that will be earned over the period of 8 years?

c) Boston Company agreed to pay a severance package to a discharged employee. The company will pay $75,000 at the end of the first year, $112,500 at the end of the second year, and $150,000 at the end of the third year.

What is the present value of this obligation?

Answer 1

Q1.
Interest paid each year			6000
Borrowed amount paid			115000
Annuity factor at 7% for 7 years			5.3893
Present value factor for Yr-7			0.62275
Present value of interest			32335.8
Present value of borrowed amt			71616.25
Total Present value of amount			103952.1
Q2.
Amount required at end of Yr-8			490000
PV factor at Yr-8 at 7%			0.582
Present value of amount required			285180
Amount need to be deposited: $ 285180
Q3.
Yr	Cash outflows		PVF @ 7%	Present value
1	-75000		0.9346	-70095
2	-112500		0.8734	-98257.5
3	-150000		0.8163	-122445
	Present value of outflows			-290798