P$9-10$

Computing Present Values $($$ AP$9-10)$

On January $1.$ Boston Company completed the following transactions $($use a $7$ percent annual interest rate for all transactions$)$:

a$.$ Promised to pay a flxed 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 $7$ th year.

b$.$ 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.

c$.$ 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.

d$.$ Purchased a $$170,000$ machine on January $1$ of this year for $$34,000$ cash. A flve$-$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.

Required $($show computations and round to the nearest dollar$)$:

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

In transaction $($b$).$ what single sum amount must the company deposit on January $1$ of this year? What is the total amount of interest

revenue that will be earned?

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

In transaction $($d$),$ what is the amount of each of the equal annual payments that will be paid on the note? What is the total amount

of interest expense that will be incurred?