On January 1 of this year. Shannon Company completed the following transactions

Question

On January 1 of this year. Shannon Company completed the following transactions assume a 9% annual interest rate: tables provided.) o o E and the appropriate actor ion he a. Bought a delivery truck and agreed to pay $61,600 at the end of three years. b. Rented an office building and was given the option of paying $11,600 at the end of each of the next three years or paying $29,600 immediately. c. Established a savings account by depositing a single amount that will increase to $93,200 at the end of seven years. d. Decided to deposit a single sum in the bank that will provide 9 equal annual year-end payments of $41,600 to a retired employee (payments starting December 31 of this year) Required: 1. What is the cost of the truck that should be recorded at the time of purchase? (Round your answer to nearest whole dollar.) of the truck 2. Which option for the office building results in the lowest present value? Pay in single installment Pay in three installments 3. What single amount must be deposited in this account on January 1 of this year? (Round your answer to nearest whole dollar.) Amount to deposit 4. What single sum must be deposited in the bank on January 1 of this year? (Round your answer to nearest whole dollar.) t to deposit

Explanation / Answer

1. Cost of the Truck is the Present Value of $61,600

Rate = 9%

Term 3 year

Present Value of $1 = (1/(1+9%)^3) = 0.7721

Present Value of 61,600 = 61,600*0.7721 = $47,567 (rounded off)

2. Now whether to pay in one installment or pay upfront will depend on the PV of Outflow under both option

Present Value of Outflow in case of upfront payment = $29,600

Present Value of Outflow in case of installment payment = 11,600 * PVA of 1$

PVA of 1$ = 2.53

PVA of 11,600 = 11,600*2.53 = $29,363

Since Present Value of Installment payment is lower than upfront payment, hence payment in installment is correct option.

3. Amount to be invested today to get $93,200 at the end of 7 years = Present Value of 93,200.

PV of 1$ with 7 year term = 0.5470

Present Value for 93,200 = 93200*0.5470 = $50,984

4. Single sum which must be deposited today to get 41,600 for 9 year is calculated as below

Present Value of Annuity of 1$ for 9 Year @ 9% = 6.00 (if you deposit $6 today we will get $1 for next 9 year)

Present Value of Annuity of $41,600 = 41,600*6 = $249,402.

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