Applications of Present Value

Lisette, Inc.’s management took the following actions that went into effect on January 2, 2014. Each action involved an application of present value.

a. Asked for another fund to be established by a single payment to accumulate to $150,000 in four years.

b. Approved the purchase of a parcel of land for future plant expansion. Payments are to start January 2, 2014, at $100,000 per year for five years.

Required:

1. Assuming an annual interest rate of 8 percent and using Tables 1 and 2 in Appendix B, answer the following questions:

a. In action a, how much will need to be deposited initially to accumulate the desired amount?

b. In action b, what is the purchase price (present value) of the land?

2. What is the fundamental reason present value analysis is a useful tool in making business decisions?