Chapter 6: Question 6BE (page 302)
Steve Madison needs $250,000 in 10 years. How much must he invest at the end of each year, at 5% interest, to meet his needs?
The amount which should be invested at the end of each year is $19,876.
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Question:Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.
Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of \(2,600,000, or it can make annual payments of \)300,000 for 15 years, each payment due on the last day of the year. Instructions Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions (a) Examining each item in P&G’s balance sheet, identify those items that require present value, discounting, or interest computations in establishing the amount reported. (The accompanying notes are an additional source for this information.)
(b) (1) What interest rates are disclosed by P&G as being used to compute interest and present values?
(2) Why are there so many different interest rates applied to P&G’s financial statement elements (assets, liabilities, revenues, and expenses)?
Clancey Inc. issues $2,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Clancey receive when it issues the bonds?
During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for \(30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.
The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Stacy estimates that the vines will bear grapes that can be sold for \)60,000 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of \(110,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to \)80,000 per year.
During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at \(9,000; during the years of production, 6–40, these costs will rise to \)12,000 per year. The relevant market rate of interest for the entire period is 6%. Assume that all receipts and payments are made at the end of each year.
Instructions Dick Button has offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?
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