Austin Corporations management took the following actions, which went into effect on January 2, 2014. Each action
Question:
Austin Corporation’s management took the following actions, which went into effect on January 2, 2014. Each action involved an application of present value.
a. Austin Corporation enters into a purchase agreement that calls for a payment of $250,000 three years from now.
b. Bought out the contract of a member of top management for a payment of $25,000 per year for four years beginning January 2, 2015.
Required
1. Assuming an annual interest rate of 10 percent and using Tables 1 and 2 in Appendix B, answer the following questions:
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?
CorporationA Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Step by Step Answer:
1 a Present value of a future payment Table 1 in Appendix B Factor 10 3 periods 250000 0751 18775...View the full answer
Principles of Accounting
ISBN: 978-1133626985
12th edition
Authors: Belverd E. Needles, Marian Powers and Susan V. Crosson
