14A-3 through 14A-6

EXERCISE 14A-3 Basic Present Value Concepts LO14-7 In three years, when he is discharged from the Air Force, Steve wants to buy an $8,000 power boat. Required: What lump-sum amount must Steve invest now to have the $8,000 at the end of three years if he can invest money at: 1. Ten percent? 2. Fourteen percent? EXERCISE 14A-4 Basic Present Value Concepts LO14-7 Fraser Company will need a new warehouse in five years. The warehouse will cost $500,000 to build. Required: What lump-sum amount should the company invest now to have the $500.000 available at the end of the five-year period? Assume that the company can invest money at: 1. Ten percent. 2. Fourteen percent. EXERCISE 14A-5 Basic Present Value Concepts LO14-7 The Atlantic Medical Clinic can purchase a new computer system that will save $7,000 annually in billing costs. The computer system will last for eight years and have no salvage value. Required: What is the maximum price (i.e., the price that exactly equals the present value of the annual savings in billing costs) that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic's required rate of return is: 1. Sixteen percent? 2. Twenty percent? EXERCISE 14A-6 Basic Present Value Concepts LO14-7 The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state's newest millionaire. By choosing the six winning numbers on last week's state lottery, Mr. Ormsby won the week's grand prize totaling $1.6 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of $80,000 each. Required: If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings? Is it correct to say that Mr. Ormsby is the "state's newest millionaire"? Explain your