APPENDIX E
Time Value of Money
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE E-1
(a) Interest = p X i X n
I = $9,000 X .05 X 12 years
I = $5,400
Accumulated amount = $9,000 + $5,400 = $14,400
(b) Future value factor for 12 periods at 5% is 1.79586 (from Table 1)
Accumulated amount = $9,000 X 1.79586 = $16,162.74
BRIEF EXERCISE E-2
(1) Case A
Case B
5%
6%
3 periods
8 periods
(2) Case A
Case B
3%
4%
8 periods
12 periods
BRIEF EXERCISE E-3
FV = p X FV of 1 factor
= $8,400 X 1.60103
= $13,448.65
BRIEF EXERCISE E-4
FV of an annuity of 1 = p X FV of an annuity factor
= $60,000 X 16.86994
= $1,012,196.40
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-1
BRIEF EXERCISE E-5
FV = p X FV of 1 factor + (p X FV of an annuity factor)
= ($5,000 X 2.40662) + ($1,000 X 28.13238)
= $12,033.10 + $28,132.38
= $40,165.48
BRIEF EXERCISE E-6
FV = p X FV of 1 factor
= $35,000 X 1.46933
= $51,426.55
BRIEF EXERCISE E-7
(1) CASE A
CASE B
CASE C
(a)
12%
8%
3%
(b)
7 periods
11 periods
16 periods
(2) CASE A
CASE B
CASE C
10%
10%
4%
20 periods
7 periods
10 periods
BRIEF EXERCISE E-8
(a)
i = 10%
?
0
$25,000
1
Discount rate from Table 3 is .42410 (9 periods at 10%). Present value
of $25,000 to be received in 9 years discounted at 10% is therefore
$10,602.50 ($25,000 X .42410).
E-2
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-8 (Continued)
(b)
i = 9%
?
$25,000 $25,000 $25,000 $25,000 $25,000 $25,000
Discount rate from Table 4 is 4.48592 (6 periods at 9%). Present value of
6 payments of $25,000 each discounted at 9% is therefore $112,148.00
($25,000 X 4.48592).
BRIEF EXERCISE E-9
i = 8%
?
$750,000
Discount rate from Table 3 is .63017 (6 periods at 8%). Present value of
$750,000 to be received in 6 years discounted at 8% is therefore $472,627.50
($750,000 X .63017). Chaffee Company should therefore invest $472,627.50
to have $750,000 in six years.
BRIEF EXERCISE E-10
i = 6%
?
0
$450,000
1
Discount rate from Table 3 is .62741 (8 periods at 6%). Present value of
$450,000 to be received in 8 years discounted at 6% is therefore $282,334.50
($450,000 X .62741). Lloyd Company should invest $282,334.50 to have
$450,000 in eight years.
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-3
BRIEF EXERCISE E-11
i = 8%
?
$46,000 $46,000 $46,000 $46,000
$46,000 $46,000
14
15
Discount rate from Table 4 is 8.55948. Present value of 15 payments of
$46,000 each discounted at 8% is therefore $393,736.08 ($46,000 X 8.55948).
Arthur Company should pay $393,736.08 for this annuity contract.
BRIEF EXERCISE E-12
i = 5%
?
$80,000
$80,000
$80,000
$80,000
$80,000
$80,000
Discount rate from Table 4 is 5.07569. Present value of 6 payments of $80,000
each discounted at 5% is therefore $406,055.20 ($80,000 X 5.07569). Kaehler
Enterprises invested $406,055.20 to earn $80,000 per year for six years.
E-4
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-13
i = 5%
?
$300,000
Diagram
for
Principal
19
20
i = 5%
?
$16,500 $16,500 $16,500 $16,500
$16,500 $16,500
Diagram
for
Interest
19
Present value of principal to be received at maturity:
$300,000 X 0.37689 (PV of $1 due in 20 periods
at 5% from Table 3)...............................................................
Present value of interest to be received periodically
over the term of the bonds: $16,500* X 12.46221
(PV of $1 due each period for 20 periods at 5%
from Table 4) .........................................................................
Present value of bonds ................................................................
20
$113,067*
205,626**
$318,693**
*$300,000 X .055
**Rounded.
BRIEF EXERCISE E-14
The bonds will sell at a discount (for less than $300,000). This may be proven
as follows:
Present value of principal to be received at maturity:
$300,000 X .31180 (PV of $1 due in 20 periods
at 6% from Table 3)...............................................................
Present value of interest to be received periodically
over the term of the bonds: $16,500 X 11.46992
(PV of $1 due each period for 20 periods at 6%
from Table 4) .........................................................................
Present value of bonds ................................................................
$ 93,540*
189,254*
$282,794*
*Rounded.
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-5
BRIEF EXERCISE E-15
i = 6%
?
$65,000
Diagram
for
Principal
i = 6%
?
$2,600
$2,600
$2,600
$2,600
$2,600
$2,600
Diagram
for
Interest
Present value of principal to be received at maturity:
$65,000 X .70496 (PV of $1 due in 6 periods
at 6% from Table 3) .............................................................
Present value of interest to be received annually
over the term of the note: $2,600* X 4.91732
(PV of $1 due each period for 6 periods at
6% from Table 4) .................................................................
Present value of note received ..................................................
$45,822.40
12,785.03
$58,607.43
*$65,000 X .04
E-6
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-16
i = 4%
?
$2,500,000
Diagram
for
Principal
14
15
16
i = 4%
?
$75,000 $75,000 $75,000 $75,000
$75,000 $75,000 $75,000
Diagram
for
Interest
14
15
Present value of principal to be received at maturity:
$2,500,000 X 0.53391 (PV of $1 due in 16 periods
at 4% from Table 3)..............................................................
Present value of interest to be received periodically
over the term of the bonds: $75,000* X 11.65230
(PV of $1 due each period for 16 periods at 4%
from Table 4) ........................................................................
Present value of bonds and cash proceeds .............................
*($2,500,000 X .06 X 1/2)
16
$1,334,775
873,923**
$2,208,698**
**Rounded
BRIEF EXERCISE E-17
i = 9%
?
$3,200 $3,200 $3,200 $3,200 $3,200 $3,200 $3,200 $3,200
Discount rate from Table 4 is 5.53482. Present value of 8 payments of $3,200
each discounted at 9% is therefore $17,711.42 ($3,200 X 5.53482). Mark
Barton should not purchase the tire retreading machine because the present
value of the future cash flows is less than the $18,000 purchase price of the
retreading machine.
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-7
BRIEF EXERCISE E-18
i = 5%
?
$48,850
$48,850
$48,850
$48,850
$48,850
$48,850
10
Discount rate from Table 4 is 7.72173. Present value of 10 payments of
$48,850 each discounted at 5% is therefore $377,206.51 ($48,850 X 7.72173).
Frazier Company should receive $377,206.51 from the issuance of the note.
BRIEF EXERCISE E-19
i = 8%
?
$40,000
$45,000
$50,000
To determine the present value of the future cash inflows, discount the future
cash flows at 8%, using Table 3.
Year 1 ($40,000 X .92593) =
Year 2 ($45,000 X .85734) =
Year 3 ($50,000 X .79383) =
Present value of future cash inflows
$ 37,037.20
38,580.30
39,691.50
$115,309.00
To achieve a minimum rate of return of 8%, Leffler Company should pay no
more than $115,309.00. If Leffler pays less than $115,309.00, its rate of
return will be greater than 8%.
E-8
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-20
i=?
$4,765.50
$12,000
11
12
Present value = Future value X Present value of 1 factor
$4,765.50 = $12,000 X Present value of 1 factor
Present value of 1 factor = $4,765.50 $12,000 = .39713
The .39713 for 12 periods approximates the value found in the 8% column
(.39711). Colleen Mooney will receive a 8% return.
BRIEF EXERCISE E-21
i = 11%
$29,319
$75,000
n=?
Present value = Future value X Present value of 1 factor
$29,319 = $75,000 X Present value of 1 factor
Present value of 1 factor = $29,319 $75,000 = .39092
The .39092 at 11% is found in the 9 years row. Wayne Kurt therefore must
wait 9 years to receive $75,000.
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-9
BRIEF EXERCISE E-22
i=?
?
$1,200 $1,200 $1,200 $1,200 $1,200 $1,200
$1,200 $1,200
14
15
$10,271.38
Present value = Future amount X Present value of an annuity factor
$10,271.38 = $1,200 X Present value of an annuity factor
Present value of an annuity factor = $10,271.38 $1,200 = 8.55948
The 8.55948 for 15 periods is found in the 8% column. Joanne Quick will
therefore earn a rate of return of 8%.
BRIEF EXERCISE E-23
i = 9%
$1,300 $1,300 $1,300 $1,300 $1,300 $1,300
$6,542.83
n=?
Present value = Future amount X Present value of an annuity factor
$6,542.83 = $1,300 X Present value of an annuity factor
Present value of an annuity factor = $6,542.83 $1,300 = 5.03295
The 5.03295 at an interest rate of 9% is shown in the 7-year row. Therefore,
Patty will receive 7 payments.
E-10
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-24
10*
18,000
50,000
I/YR.
PV
PMT
FV
10.76%
*2024 2014
BRIEF EXERCISE E-25
10
60,000
8,860
I/YR.
PV
PMT
FV
7.80%
BRIEF EXERCISE E-26
40
178,000*
8,400
I/YR.
PV
PMT
FV
3.55%
(semiannual)
*$198,000 $20,000
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-11
BRIEF EXERCISE E-27
(a)
Inputs:
6.9
16,000
PV
PMT
FV
Answer:
86,530.07
(b)
Inputs:
10
8.65
14,000**
200,000*
PV
PMT
FV
Answer:
178,491.52
*200 X $1,000
E-12
**$200,000 X .07
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
BRIEF EXERCISE E-28
(a)
Noteset payments at 12 per year.
Inputs:
96
7.8
N
42,000
PV
PMT
FV
Answer:
589.48
(b)
Noteset payments to 1 per year.
Inputs:
5
7.25
N
8,000
PV
PMT
FV
Answer:
Copyright 2013 John Wiley & Sons, Inc.
1,964.20
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
E-13
E-14
Copyright 2013 John Wiley & Sons, Inc.
Weygandt Financial, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)