D.Eric Hirst Link full download: https://getbooksolutions.com/download/solutions-manual-for-financial-reporting-for-managers-a-value-creation-perspective-1st-edition-by-jamie-pratt-eric-
Trang 1D.Eric Hirst
Link full download: https://getbooksolutions.com/download/solutions-manual-for-financial-reporting-for-managers-a-value-creation-perspective-1st-edition-by-jamie-pratt-eric-hirst/
APPENDIX A Time Value of Money
TEST YOUR KNOWLEDGE: PRESENT AND FUTURE VALUES
Present values at 8%:
a Value = $10,000
= $11,493.28
= $13,916.30
= $11,978.13
= $14,587.25
= $5,349.78
= $11,133.04
Future values at 8%:
= $13,604.90
Trang 2b Value = $2,000 Future value factor for an ordinary annuity for i = 8% and n = 8
= $21,273.26
= $17,530.55
Trang 3d Value = ($3,000 Future value factor for an ordinary annuity for i = 8% and n = 5) Future
value factor for i = 8% and n = 5
= $25,859.91
e Value = $25,000
= $6,240.00
= $14,024.44
Congratulations You just won the lottery:
Option 1
Option 2
Option 3
Option 3 might be chosen because it has the highest present value In other words, if receiving the equivalent amounts for each of the 3 payment patterns, alternative 3 would yield the largest present value today Option 2 might be chosen because it doesn’t involve waiting around and you could blow all your winnings right away
Trang 41 To determine whether the offer of $110,000 today is a good deal, the future cash flows should
be converted into equivalent values in present dollars (i.e., present values) The contract specifies two types of future cash flows: $2,000 at the beginning of each year for ten years and a lump-sum receipt of $300,000 in ten years The present values of the two types of cash flows are calculated below
(a) Present value of annual receipts:
= $13,518.04
(b) Present value of lump-sum receipt:
= $115,662.00
(c) Total present value:
Value = $13,518.04 + $115,662.00
= $129,180.04
Since the present value of the future cash flows exceeds $110,000, it would not be a good choice to accept $110,000 in cash today in place of the note By accepting the cash of
$110,000 now, you would be worse off by more than $19,000
2 As the discount rate increases, the present value of future cash flows decreases Since the present value of the future cash flows discounted at 10% exceeds $110,000, the discount rate
at which you would be a good choice to accept $110,000 in cash instead of the note must be
greater than 10% Try i = 12%
= $12,656.50 + $96,591.00
= $109,247.50 With a discount rate of 12%, the present value of the future cash flows is slightly less than
$110,000, which implies that you would be better off accepting $110,000 in cash today rather than accepting the note
Case and Review Questions: Shoprite Holdings, Ltd.—Revenue Recognition (p 389)
Trang 52 Under these circumstances Shoprite would recognize R1427 at the time of sale This is based on a 15% interest rate (factor of 2.85498 from table A-6 for 4 periods @15% x R500
Case and Review Questions: E.ON AG—Asset Retirement Obligations (p 389)
1 The present value of the decommissioning costs at 9% for 20 years would be calculated by multiplying the factor from table A-4 (0.17843) by €500 million or €89,215,000 This cost would be added to the €3 billion cash price of the reactor when the asset is recorded, making the total cost €3,089,215,000
2 Assuming straight-line depreciation, the balance sheet value of the retirement obligation would be €66,911,250, 75% (15/20) of the capitalized decommissioning cost
3 The depreciation recorded each year on the capitalized decommissioning cost would be
€4,460,750, and the annual depreciation on the total cost of the reactor including the cash price and the decommissioning costs would be €154,460,750 Without the depreciation on the decommissioning costs the annual depreciation on the reactor would only be a mere
€150 million If the decommissioning costs had been ignored, there would have been a failure to spread this cost over the useful life of the asset Net income for the 20 year life of the asset would have been overstated
Case and Review Questions: La Quinta Corporation—Asset Impairment Tests (p 390)
1 The asset is probably not impaired The criteria for the first step relates to undiscounted cash flows, not operating profits The cash flows generated by the property would approximate the operating profits plus annual depreciation If the annual depreciation is
$150,000, (5% of book value) annual cash flow would be about $375,000 Over the next
10 years undiscounted cash flows would exceed the book value of the property Furthermore, the time period considered in step one would not end after ten years, unless ten years was the expected useful life of the property The gross proceeds from sale of the property would also be taken into consideration in the analysis
2 Determining the future cash flows from any given asset requires one or more crystal balls along with expertise in the use of star charts, tarot card interpretation, readings of animal entrails and other scientifically proven methods of predicting the future
3 A $325,000 annual return on a $3,000,000 investment would represent a 10.83% rate of return: $325,000 ÷ $3,000,000 = 1083 Consider however, that the profits are only indirectly related to the cash flows