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

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ISBN: 9780136946465

Author: SANNELLA

Publisher: VST

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Chapter 7, Problem 7.12P

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The option that F should choose.

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Chapter 7 Solutions

EBK INTERMEDIATE ACCOUNTING

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...

Ch. 7 - Prob. 7.3BE Ch. 7 - Prob. 7.4BE Ch. 7 - Prob. 7.5BE Ch. 7 - Present Value of a Single Sum, Compound Interest....Ch. 7 - Future Value of a Single Sum, Compound Interest....Ch. 7 - Prob. 7.8BE Ch. 7 - Present Value of a Single Sum, Compounded Interest...Ch. 7 - Prob. 7.10BE Ch. 7 - Present Value of a Single Sum, Calculating Time...Ch. 7 - Future Value of an Ordinary Annuity. An...Ch. 7 - Future Value of an Annuity Due. Mariah Carey...Ch. 7 - Future Value of an Ordinary Annuity: Calculating...Ch. 7 - Present Value of an Ordinary Annuity. CB...Ch. 7 - Present Value of an Annuity Due, Semiannual...Ch. 7 - Prob. 7.17BE Ch. 7 - Ordinary Annuity, Annuity Due, Using Interest...Ch. 7 - Prob. 7.2E Ch. 7 - Prob. 7.3E Ch. 7 - Prob. 7.4E Ch. 7 - Prob. 7.5E Ch. 7 - Prob. 7.6E Ch. 7 - Prob. 7.7E Ch. 7 - Future Value of an Ordinary Annuity, Future Value...Ch. 7 - Single Sum, Solving for Other Variables. Two...Ch. 7 - Ordinary Annuity, Solve for Interest Rate,...Ch. 7 - Present Value, Note Payable Prices. Wiz Khalifa...Ch. 7 - Future Value of a Deterred Annuity. Lenny Shafer...Ch. 7 - Prob. 7.13E Ch. 7 - Present Value of an Ordinary Annuity, Present...Ch. 7 - Prob. 7.15E Ch. 7 - Prob. 7.16E Ch. 7 - Future Value of an Annuity Due, Decision Making....Ch. 7 - Prob. 7.18E Ch. 7 - Prob. 7.19E Ch. 7 - Prob. 7.20E Ch. 7 - Prob. 7.21E Ch. 7 - Prob. 7.22E Ch. 7 - Prob. 7.1P Ch. 7 - Present Value, Present Value of an Ordinary...Ch. 7 - Present Value, Present Value of an Annuity Due,...Ch. 7 - Prob. 7.4P Ch. 7 - Prob. 7.5P Ch. 7 - Prob. 7.6P Ch. 7 - Prob. 7.7P Ch. 7 - Present Value of an Annuity Due, Deferred...Ch. 7 - Present Value of an Ordinary Annuity, Present...Ch. 7 - Future Value of an Ordinary Annuity, Deferred...Ch. 7 - Present Value, Present Value of an Ordinary...Ch. 7 - Prob. 7.12P Ch. 7 - Prob. 7.13P Ch. 7 - Prob. 7.14P Ch. 7 - Prob. 7.15P

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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.

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