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8 November, 17:52

On January 1, Boston Company completed the following transactions (use a 7% annual interest rate for all transactions) : (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor (s) from the tables provided.) Promised to pay a fixed amount of $6,000 at the end of each year for seven years and a one-time payment of $115,000 at the end of the 7th year. Established a plant remodeling fund of $490,000 to be available at the end of Year 8. A single sum that will grow to $490,000 will be deposited on January 1 of this year. Agreed to pay a severance package to a discharged employee. The company will pay $75,000 at the end of the first year, $112,500 at the end of the second year, and $150,000 at the end of the third year. Purchased a $170,000 machine on January 1 of this year for $34,000 cash. A five-year note is signed for the balance. The note will be paid in five equal year-end payments starting on December 31 of this year.

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  1. 8 November, 18:41
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    This question is incomplete, here's the remaining part to complete the question:

    1. In transaction (a), determine the present value of the debt.

    2-a. In transaction (b), what single sum amount must the company deposit on January 1,?

    2-b. What is the total amount of interest revenue that will be earned?

    3. In transaction (c), determine the present value of this obligation.

    4-a. In transaction (d), what is the amount of each of the equal annual payments that will be paid on the note?

    4-b. What is the total amount of interest expense that will be incurred?

    Explanation:

    a) A sum of $6,000 is to be paid at the end of each year for 7 years and the principal amount $115,000 to be paid at the end of 7th year.

    PV=$6,000 / (1+0.07) ^1 + $6,000 / (1+0.07) ^2 + $6,000 / (1+0.07) ^3 + $6,000 / (1+0.07) ^4 + $6,000 / (1+0.07) ^5 + $6,000 / (1+0.07) ^6 + $6,000 / (1+0.07) ^7 + $115,000 / (1+0.07) ^7

    PV=$5,607.47 + $5,240.63 + $4,897.78 + $4,577.37 + $4,277.91 + $3,998.05 + $3,736.49 + $71,616.22

    PV=$103,951.92

    b) Let the single sum that will grow to $490,000 at 7% interest per annum at the end of 8 years be X

    FV=PV (1+i) ^n

    $490,000 = X (1+0.07) ^8

    Thus,

    X = $490,000 / (1.07) ^8

    X = $490,000/1.7182

    X = $285,182

    Thhus, a single sum of $285,182 needs to be deposited for 8 years at 7% interest p. a.

    The total amount of interest revenue is ($490,000-$285,182) = $204,818

    c) PV = $75,000 / (1.07) ^1 + $112,500 / (1.07) ^2 + 150,000 / (1.07) ^3

    PV = $70,093.45 + $98,261.85 + $122,444.68

    = $290,800

    FV = $75,000 * (1.07) ^1 + $112,500 * (1.07) ^2 + 150,000 * (1.07) ^3

    = $80,250 + $85,867 + $91,878

    = $257,995

    d) The cost of the machine is $170,000. Immediate cash paid $34,000. Loan Amount is ($170,000-$34,000) = $136,000

    The PVA factor at 7% p. a compounded annually for 5 years is 4.1002

    Thus, the PMT = 136,000/4.1002

    = $33,169

    Thus, the amount of each annual payment is $33,169 for 5 years.

    The total amount to be paid is ($34,000+$33,169*5)

    =$34,000+$165845

    =$199845

    The interest expense is ($199845 - $170,000)

    = $29,845
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