Accounting Problems Five problems and Solutions

 

 

 

 

 

 

 

 

1. 

 

Future Value (Year 5) = $10,000 (1.05)5 = $12,762.82

New Balance (Year 5) = $12,762.82 – $7,500 = $5,262.85

Future Value (Year 8) = $5,262.82 (1.05)3 = $6,092.37

 

 

 

2.

 

PV of $10,000 = $10,000 x 0.3855 = $3,855

PV of Annuity of $400 = $400 x 12.4622 = $4,984.88

Value of Bond = $3,855 + $4,984.88 = $8,839.88

 

 

 

 

3.

 

PV of Alternative A = $300 x 4.4873 = $1,346.19

PV of Alternative B = $400 x (0.8696) + $300 (0.5718) + $600 (0.3269) = $715.52

PV of Alternative C = $600 (0.5718) = $343.08

 

 

 

 

 

4.

 

          Cost of External Equity = [$1.15 + ($22 x 0.95 x 7%)] / ($22 x 0.95) = 12.50%

 

 

 

5.

         

a.

NPV of Project A = -$2,000 + $500 (4.4226) = $211.30

NPV of Project B = -$2,000 + $5,650 (0.4251) = $401.42

 

IRR of Project A = 16.33%

IRR of Project B = 15.99%

 

c.

Project B should be chosen because it has higher NPV.

 

b.

Project B is a better option while IRR indicates ProjectA as better option.

The ranking conflict is due to the fact that based on NPV