Explanation Solution: Present Value: It refers to the value of an amount today after considering the time value of money and the discounted rate. In other words, it is discounted value of the amount to be received in future. a. Purchase Option: Given, The amount to be spent on purchase now is $100,000. The annual payment to be made at the end of each year is $3,000. The residual value to be received at the end of life of refrigerator is $15,000. Total time period is 15 years. Rate of interest is 10% compounded annually. Formula to calculate the present value of ordinary annuity is: P V = P M T × ( 1 − 1 ( 1 + I ) n I ) Where, PV is the future value. PMT is the period payment. I is the rate of interest. n is the time period. Substitute $3,000 for PMT , 10% for I and 15 for n in the above formula, P V = $ 3 , 000 × ( 1 − 1 ( 1 + 10 % ) 15 10 % ) = $ 3 , 000 × 7.60608 = $ 22 , 818.24 Present value of annual maintenance cost is $22,818.24. Formula to calculate present value is: P V = F V ( 1 + I ) n Substitute $15,000 for FV , 10% for I and 15 for n in the above formula, P V = $ 15 , 000 ( 1 + 10 % ) 15 = $ 15 , 000 × 0

Intermediate Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText -- Access Card Package (2nd Edition)

2nd Edition

ISBN: 9780134833118

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

See similar textbooks

Concept explainers

Mortgages

A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.

Mortgage

The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yea…

Videos

Question

Chapter 7, Problem 7.12P

To determine

The option that F should choose.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Chapter 7, Problem 7.11P

Chapter 7, Problem 7.13P

Students have asked these similar questions

Given correct answer general Accounting

Find the per share

Chapter 7 Solutions

Intermediate Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText -- Access Card Package (2nd Edition)

Ch. 7 - Prob. 7.1Q Ch. 7 - Prob. 7.2Q Ch. 7 - If interest is compounded more than once a year,...Ch. 7 - Prob. 7.4Q Ch. 7 - Can an ordinary annuity table be used to determine...Ch. 7 - Prob. 7.6Q Ch. 7 - Is the present value of an ordinary annuity more...Ch. 7 - Prob. 7.8Q Ch. 7 - Simple Interest. Assume Shafer Corporation...Ch. 7 - Compound Interest. Assume Shafer Corporation...

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

The option that F should choose.

Solution Summary: The author explains that the cost under leasing option is lesser than the purchasing option, so the leasing should be chosen by F.

Concept explainers

Videos

The option that F should choose.

Want to see the full answer?

Chapter 7 Solutions