Wilke Properties owns land on which natural gas wells are located. Cincinnati Gas Company signs a note to buy this land from Wilke on January 1, 2012. The note requires Cincinnati to pay Wilke $ 775,000 per year for 25 years. The first payment is to be made on December 31, 2012. The appropriate interest rate is 9 percent compounded annually.
Required:
Round answers to two decimal places.
1. Prepare a diagram of the appropriate cash flows from Cincinnati Gas’s perspective.
2. Determine the present value of the payments.
3. Indicate what entry Cincinnati Gas should make at January 1, 2012.