Question

Answer the following questions. (a) On May 1, 2017, 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, 2017. What present value concept is appropriate for this situation? (b) On June 1, 2017, Seymour Inc. purchased a new machine that it does not have to pay for until June 1, 2019. The total payment on June 1, 2019, 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 \(35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation? (d) Megan Hoffman invests in a “jumbo” \)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?

Short answer

Part a has a present value of annuity due, part b has a present value of 1, part c has a future value of an annuity due, and part D should use the future value of 1 table.

Step-by-step solution

Definition of future value of 1 table

The future value of 1 table shows what the future value of $1 will grow to if invested at the rate mentioned in the column heading and compounded for a number of periods.

Appropriate concept for each situation

The present value of an annuity dueis an appropriate concept for the situation in part A.

In part B, the most appropriate concept is the present value of 1.

The future value of an annuity dueis appropriate for part C.

For part D, the future value of 1 table should be used.