Appendix C: Time Value of Money Solutions To Brief Exercises

APPENDIX C
Time Value of Money

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE C-1
1.
(a) 12%
(b) 10%
(c) 4%
6
15
24
2.
(a) 8%
(b) 10%
(c) 6%
20
5
8
BRIEF EXERCISE C-2

(a)
i = 8%
?
0
$30,000
5
Discount rate from Table 1 is .54027 (8 periods at 8%). Present value of

$30,000 to be received in 8 years discounted at 8% is therefore
$16,208.10 ($30,000 X .54027).
(b)
i = 9%
?
$30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Copyright 2009 John Wiley & Sons, Inc.Weygandt, Accounting Principles, 9/e, Solutions Manual(For Instructor Use Only)
C-1
Discount rate from Table 2 is 4.48592 (6 periods at 9%). Present value of

6 payments of $30,000 each discounted at 9% is therefore $134,577.60
($30,000 X 4.48592).
C-2 Copyright 2009 John Wiley & Sons, Inc.Weygandt, Accounting Principles, 9/e, Solutions Manual(For Instructor Use Only)
BRIEF EXERCISE C-3
i = 10%
$600,000
?
0

$600,000 to be received in 5 years discounted at 10% is therefore $372,552
($600,000 X .62092). Ramirez Company should therefore invest $372,552 to
have $600,000 in five years.
BRIEF EXERCISE C-4

i = 9%
?
0
$700,000
5
Discount rate from Table 1 is .50187 (8 periods at 9%). Present value of $700,000
to be received in 8 years discounted at 9% is therefore $351,309 ($700,000 X .
50187). LaRussa Company should invest $351,309 to have $700,000 in eight
years.
BRIEF EXERCISE C-5

i = 10%
$36,000
?
0
C-3

$36,000 to be received in 4 years discounted at 10% is therefore $24,588.36
($36,000 X .68301). Polley should receive $24,588.36 upon the sale of the note.
BRIEF EXERCISE C-6
i = 8%
?
0
$60,000
2

$60,000 to be received in 3 years discounted at 8% is therefore $47,629.80
($60,000 X .79383). Marichal Company should receive $47,629.80 upon issuance of the zero-interest bearing note.
BRIEF EXERCISE C-7

i = 6%
?
$40,000 $40,000 $40,000 $40,000
$40,000 $40,000
14
15
Discount rate from Table 2 is 9.71225. Present value of 15 payments of $40,000

each discounted at 6% is therefore $388,490 ($40,000 X 9.71225). Colaw
Company should pay $388,490 for this annuity contract.
BRIEF EXERCISE C-8

i = 11%
?
$100,000 $100,000 $100,000 $100,000
C-5

each discounted at 11% is therefore $310,245 ($100,000 X 3.10245). Sauder
Enterprises invested $310,245 to earn $100,000 per year for four years.
BRIEF EXERCISE C-9
Diagram
for
Principal
i = 4%
$200,000
19
20
i = 4%
Diagram
for
Interest
$10,000 $10,000 $10,000 $10,000
$10,000 $10,000
19
Present value of principal to be received at maturity:

$200,000 X 0.45639 (PV of $1 due in 20 periods
at 4% from Table 1).............................................................
Present value of interest to be received periodically
over the term of the bonds: $10,000 X 13.59033
(PV of $1 due each period for 20 periods at 4%
from Table 2).......................................................................
Present value of bonds..............................................................
20
$91,278.00
135,903.30
$227,181.30
BRIEF EXERCISE C-10

The bonds will sell at face value or $200,000. This may be proven as follows:
$200,000 X .37689 (PV of $1 due in 20 periods
at 5% from Table 1).............................................................
$75,378*
C-7
from Table 2).......................................................................

Present value of bonds..............................................................
124,622*
$200,000*
*Rounded.
BRIEF EXERCISE C-11
Diagram
for
Principal
i = 9%
$75,000
i = 9%
Diagram
for
Interest
$6,000
$6,000
$6,000
$6,000
$6,000
$6,000

$75,000 X .59627 (PV of $1 due in 6 periods
at 9% from Table 1)..............................................................
Present value of interest to be received annually
over the term of the note: $6,000 X 4.48592
(PV of $1 due each period for 6 periods at
9% from Table 2)..................................................................
Present value of note received..................................................
$44,720.25
26,915.52
$71,635.77
C-9
BRIEF EXERCISE C-12
Diagram
for
Principal
i = 5%
Diagram
for
Interest
$1,000,000
14
i = 5%
$40,000 $40,000 $40,000 $40,000
15
16
$40,000 $40,000 $40,000
14
15
16

$1,000,000 X 0.45811 (PV of $1 due in 16 periods
at 5% from Table 1)...........................................................
from Table 2).....................................................................
Present value of bonds and cash proceeds..............................
$458,110
433,511
$891,621
BRIEF EXERCISE C-13

i = 11%
?
$2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800
C-10Copyright 2009 John Wiley & Sons, Inc.Weygandt, Accounting Principles, 9/e, Solutions Manual(For Instructor Use Only)
Discount rate from Table 2 is 5.14612. Present value of 8 payments of $2,800 each
discounted at 11% is therefore $14,409.14 ($2,800 X 5.14612). Ricky Cleland
should not purchase the tire retreading machine because the present value of
the future cash flows is less than the purchase price of the
retreading machine.
C-11
BRIEF EXERCISE C-14
i = 5%
?
$78,978
$78,978
$78,978
$78,978
$78,978
$78,978
11
12

each discounted at 5% is therefore $700.001.75 ($78,978 X 8.86325). Martinez
Company should receive $700,001.75 from the issuance of the note.
BRIEF EXERCISE C-15

i = 12%
?
$30,000
$40,000
$60,000
3
To determine the present value of the future cash flows, discount the future
cash flows at 12%, using Table 1.
Year 1 ($30,000 X .89286) =
Year 2 ($40,000 X .79719) =
Year 3 ($60,000 X .71178) =
Present value of future cash flows
$ 26,785.80
31,887.60
42,706.80
$101,380.20
To achieve a minimum rate of return of 12%, Durler Company should pay no

more than $101,380.20. If Durler pays less than $101,380.20 its rate of return
will be greater than 12%.
C-13
BRIEF EXERCISE C-16
i=?
$2,745
$10,000
14
15
Present value = Future amount X Present value of 1 Factor

$2,745 = $10,000 X .2745
The .2745 for 15 periods is found in the 9% column. Carla Garcia will receive a
9% return.
BRIEF EXERCISE C-17

i = 10%
$51,316
$100,000
n=?
Present value = Future amount X Present value of 1 Factor

$51,316 = $100,000 X .51316
The .51316 at 10% is found in the 7 years row. Sara Altom therefore must
wait 7 years to receive $100,000.
BRIEF EXERCISE C-18
i=?
?
$1,000 $1,000 $1,000 $1,000 $1,000 $1,000
$11,469.92
$1,000 $1,000
19
20
n = 20
Present value = Annuity X Present value of an annuity

$11,469.92 = $1,000 X 11.46992
The 11.46992 for 20 periods is found in the 6% column. Stacy Dains will
therefore earn a rate of return of 6%.
BRIEF EXERCISE C-19

i = 8%
$1,000 $1,000 $1,000 $1,000
$8,559.48
$1,000 $1,000
n=?
Present value = Annuity X Present value of an annuity

$8,559.48 = $1,000 X 8.55948
The 8.55948 at an interest rate of 8% is shown in the 15-year row. Diana Rossi
therefore will receive 15 payments.
C-15
BRIEF EXERCISE C-20
(a)
(b)
(c)
(d)
$10,000 X .79383 = $7,938.30.

$10,000 X .79031 = $7,903.10.
$10,000 X .71178 = $7,117.80.
$10,000 X .70496 = $7,049.60.
BRIEF EXERCISE C-21

(a)
(b)
(c)
(d)
$10,000 X .74726 = $7,472.60.

$10,000 X .83962 = $8,396.20.
$10,000 X .62092 = $6,209.20.
$10,000 X .75132 = $7,513.20.
BRIEF EXERCISE C-22

Option one has a present value of $39,500.
Option two has a present value of [$10,000 + ($8,000 X 3.79079)] = $40,326.32.
Choose option one (lower cost).
BRIEF EXERCISE C-23
(a)
$10,000 X 3.79079 = $37,907.90
(b) Receipt X 6.71008 = $50,000; Receipt = $50,000/6.71008 = $7,451.48

(c)
$11,971 X Factor = $70,000; Factor = $70,000/$11,971 = 5.84746;

5.84746 is approximately the factor for 15 years, 15%
C-17
BRIEF EXERCISE C-24

Present value of $5,000 option: $5,000 X 6.71008 = $33,550.
Present value of $9,000 option: $9,000 X 3.99271 = $35,934.
Present value of $30,000 option: $30,000.
Select the $9,000 option (highest present value).
BRIEF EXERCISE C-25
$24,000 cost $2,400 down payment = $21,600.
Payment X 7.36009 = $21,600.
Payment = $21,600/7.36009 = $2,934.75
BRIEF EXERCISE C-26

(a)
$40,000 X .62741 =
2,000 X 6.20979 =
$25,096
12,420
$37,516
(b) $40,000 X .73069 =

2,000 X 6.73274 =
$29,228
13,465
$42,693
BRIEF EXERCISE C-27

(a)
$90,000 X .55684 =
4,050 X 8.86325 =
$50,116
35,896
$86,012
(b) $90,000 X .62460 =

4,050 X 9.38507 =
$56,214
38,010
$94,224
C-19

Appendix C: Time Value of Money Solutions To Brief Exercises

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Appendix C: Time Value of Money Solutions To Brief Exercises

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APPENDIX C

Time Value of Money

BRIEF EXERCISE C-2

Discount rate from Table 1 is .54027 (8 periods at 8%). Present value of

$30,000 $30,000 $30,000 $30,000 $30,000 $30,000

Discount rate from Table 2 is 4.48592 (6 periods at 9%). Present value of

BRIEF EXERCISE C-3

Discount rate from Table 1 is .62092 (5 periods at 10%). Present value of

BRIEF EXERCISE C-4

BRIEF EXERCISE C-5

Discount rate from Table 1 is .68301 (4 periods at 10%). Present value of

BRIEF EXERCISE C-6

Discount rate from Table 1 is .79383 (3 periods at 8%). Present value of

BRIEF EXERCISE C-7

$40,000 $40,000 $40,000 $40,000

Discount rate from Table 2 is 9.71225. Present value of 15 payments of $40,000

BRIEF EXERCISE C-8

$100,000 $100,000 $100,000 $100,000

Discount rate from Table 2 is 3.10245. Present value of 4 payments of $100,000

BRIEF EXERCISE C-9

$10,000 $10,000 $10,000 $10,000

Present value of principal to be received at maturity:

BRIEF EXERCISE C-10

from Table 2).......................................................................

BRIEF EXERCISE C-11

Present value of principal to be received at maturity:

BRIEF EXERCISE C-12

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000 $40,000

Present value of principal to be received at maturity:

BRIEF EXERCISE C-13

$2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800 $2,800

BRIEF EXERCISE C-14

Discount rate from Table 2 is 8.86325. Present value of 12 payments of $78,978

BRIEF EXERCISE C-15

To achieve a minimum rate of return of 12%, Durler Company should pay no

BRIEF EXERCISE C-16

Present value = Future amount X Present value of 1 Factor

BRIEF EXERCISE C-17

Present value = Future amount X Present value of 1 Factor

BRIEF EXERCISE C-18

$1,000 $1,000 $1,000 $1,000 $1,000 $1,000

Present value = Annuity X Present value of an annuity

BRIEF EXERCISE C-19

Present value = Annuity X Present value of an annuity

BRIEF EXERCISE C-20

$10,000 X .79383 = $7,938.30.

BRIEF EXERCISE C-21

$10,000 X .74726 = $7,472.60.

BRIEF EXERCISE C-22

$10,000 X 3.79079 = $37,907.90

(b) Receipt X 6.71008 = $50,000; Receipt = $50,000/6.71008 = $7,451.48

$11,971 X Factor = $70,000; Factor = $70,000/$11,971 = 5.84746;

BRIEF EXERCISE C-24

BRIEF EXERCISE C-26

(b) $40,000 X .73069 =

BRIEF EXERCISE C-27

(b) $90,000 X .62460 =

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