Problem 1 Computing Present Values

On January 1, 2014, Boston Company completed the following transactions (use a 7 percent annual interest rate for all transactions):

a) Borrowed $115,000 for seven years. Will pay $6,000 interest at the end of each year and repay the $115,000 at the end of the 7th year.

Determine present value of debt.

b) Boston Company determined that the company needs to replace some of its long term assets in 8 years. The company estimated that it will need $490,000 in 8 years. Boston wants to deposit a single sum to this FUND now so it would grow up to $490,000 in 8 years.

How much money does it need to deposit this Fund today?

What is the total amount of interest revenue that will be earned over the period of 8 years?

c) Boston Company 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.

What is the present value of this obligation?