Chapter 4, Problem 21P

Summary Introduction

a.

To determine:

The true promised payment under contract including the deferred payments with interest.

Explanation:

The true promised payment under the contract including the deferred payment for 20 years is computed below:

Year	Amount ($ in millions)
1	18
2	19
3	19
4	19
5	21
6	19
7	23
8	27
9	27
10	27
11	6.71958
12	5.37567
13	4.03175
14	4.03175
15	4.03175
16	4.03175
17	4.03175
18	4.03175
19	4.03175
20	4.03175
Total	263.3488

Working note:

Computation of amount including bonus.

The amount including bonus amount is computed as below:

Year

1 2 3 4 5 6 7 8 9 10

Amount ($ in millions)	Bonus ($ in millions)	Total ($ in millions
16	2	18
17	2	19
17	2	19
17	2	19
19	2	21
19		19
23		23
27		27
27		27
27		27

Computation of amount including interest

The amount without interest and with interest is given below:

Year	Amount without interest ($ in millions)	Amount with 3% interest ($ in millions)
11	5
12	4
13	3
14	3
15	3
16	3
17	3
18	3
19	3
20	3

Conclusion:

Therefore, the total promised amount under the contract is $263.3488.

b.

Summary Introduction

To prepare: The timeline of all the payments.

c.

Summary Introduction

To determine:

The present value of the contract.

d.

Summary Introduction

To determine:

The difference after comparing present value of contract with quoted value.