Andy Corporation Solution PDF

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home / study / business / accounting theory / accounting theory solutions manuals / bundle: nancial and managerial accounting, 9th + working pape

Bundle: Financial and Managerial Accounting, 9th + Working Papers, Chapters 15-28 (9th Edition) Problem

Continue to post Andy Corporation’s management took the following actions, which went into effect on January 2 2010. Each action involved an application of present value. a. Andy Corporation enters into a purchase agreement that calls for a payment of $500,000 thre years from now.

b. Bought out the contract of a member of top management for a payment of $50,000 per year for four years beginning January 2, 2011. Required 1. Assuming an annual interest rate of 10 percent and using Tables 8-1 and 8-2, answer the following questions: a. In action a, what is the present value of the liability for the purchase agreement?

b. In action b, what is the cost (present value) of the buyout?

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2. Many businesses analyze present value extensively when making decisions about investing in long-term assets. Why is this type of analysis particularly appropriate for such decisions?

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Bundle: Financial...

Financial and Princ Managerial... Acco

9th Edition

8th Edition

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Step 1 of 3 4152-8-5P AID: 649 RID: 852 1. (a) Present value of the liability Single payment = $500,000 Present value = PV factor x Payment PV factor at the end of 3rd year at 10% = 0.571 Present value = 0.571 x $500,000 =375,500 Present value = $375,500

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(b) Cost of buyout: Present value

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=158,500

Chapter 8, Problem 5P

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2. As the name suggests present value is the current value of the investment as well as future cash flows at a given rate of return. With the help of present value it can be ascertained how much an investment will yield in certain period. That is why present value is being used in long term investment planning and decisions.

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