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. Scenario 1: Given, Rate of interest is 5% Number of years is 1 year. Calculation of expected cash flow is: Estimated Loss ($) Probability Expected Cash Flow ($) 45,000 20% 9,000 130,000 75% 97,500 1,250,000 5% 62,500 Total expected cash flow loss in scenario 1 169,000 Table (1) The expected cash flow is $169,000. Formula to calculate present value is: P V = F V ( 1 + I ) n Where, PV is the future value. PMT is the period payment. I is the rate of interest. n is the time period. Substitute $169,000 for FV , 5% for I and 1 for n in the above formula, P V = $ 169 , 000 ( 1 + 5 % ) 1 = $ 169 , 000 × 0.95238 = $ 160 , 952

1st Edition

ISBN: 9780132162302

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

Publisher: PEARSON

See similar textbooks

Concept explainers

Master Budget

A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It…

Sales Budget and Selling

A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future…

Videos

Question

Chapter 7, Problem 7.20E

To determine

The expected cash flows in the given scenarios and their comparison.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Chapter 7, Problem 7.19E

Chapter 7, Problem 7.21E

Students have asked these similar questions

General Accounting

Please answer the following requirements on these financial accounting question

need help this questions general accounting

Chapter 7 Solutions

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 - Expected Cash Flows. Hiteck Electronics sells a...Ch. 7 - Prob. 7.15P

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 expected cash flows in the given scenarios and their comparison.

Solution Summary: The author compares the expected cash flows in scenarios 1 and 2. The present value of cash outflow is 160,952.22 which is lesser than scenario 2.

Concept explainers

Videos

The expected cash flows in the given scenarios and their comparison.

Want to see the full answer?

Chapter 7 Solutions