Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 50

Present value calculations Using a present value table, your calculator, or a computer program present value function, calculate the present value of

a. A car down payment of $3,000 that will be required in two years, assuming an interest rate of 10%.

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b. A lottery prize of $6 million to be paid at the rate of $300,000 per year for 20 years, assuming an interest rate of 10%.

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c. The same annual amount as in part b, but assuming an interest rate of 14%.

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d. A capital lease obligation that calls for the payment of $8,000 per year for 10 years, assuming a discount rate of 8%.

Step 1 of 5

Present value calculations:

a. The computation of present value of a car if by extracting the information,

Solution:

By using Table 6-4(Factors for calculating present value of $1), 10% column, 2 period row, the factor value of 0.8264 is obtained.

Therefore, the present value of car is equal to

Substitute:

Hence, the present value of car is.