Andy Corporations’ management took the following actions, which went into effect on January 2, 2010. Each action involved an application of present value.

a. Andy Corporation enters into a purchase agreement that calls for a payment of $500,000 three years from now.

b. Bought out the contract of a member of top management for a payment of $50,000 per year for four years beginning January 2, 2011.

Required

1. Assuming an annual interest rate of 10 percent and using Tables 1 and 2 in the appendix of present value tables, answer the following question:

a. In action a, what is the present value of the liability for the purchase agreement?

b. In action b, what is the cost (present value) of the buyout?

2. Many businesses analyze present value extensively when making decisions about investing in long-term assets. Why is this type of analysis particularly appropriate for such decisions?