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3 years ago

A company is considering an investment project that would cost $8 million today and yield a payoff of $10 million in 5 years.

Business

1 answer:

Semenov [28]3 years ago

7 0

Answer:

Kindly see explanation

Explanation:

Given the following:

Initial investment = $8,000,000

Future value (FV) = $10,000,000

PERIOD (t) = 5 Years

To know if the form should undertake the project, the present value(PV) at each interest rate should be calculated ;

A.) Interest rate (r) = 7% = 0.07

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.07)^5

PV = 10,000,000 / 1.07^5

PV = 10,000,000 / 1.4025517307

PV = $7,129,861.79483668

Should not be undertaken, PV is less than initial investment.

B.) Interest rate (r) = 6% = 0.06

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.06)^5

PV = 10,000,000 / 1.06^5

PV = 10,000,000 / 1.3382255776

PV = $7,472,581.72866057

Should not be undertaken, PV is less than initial investment.

C.) Interest rate (r) = 5% = 0.05

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.05)^5

PV = 10,000,000 / 1.05^5

PV = 10,000,000 / 1.2762815625

PV = $7,835,261.66468459

Should not be undertaken, PV is less than initial investment

D.)Interest rate (r) = 4% = 0.04

PV = FV / (1 + r)^t

PV = 10,000,000 / (1 + 0.04)^5

PV = 10,000,000 / 1.04^5

PV = 10,000,000 / 1.2166529024

PV = $8,219,271.06759351

Should be undertaken, PV is greater than initial investment

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3 years ago

The following transactions were completed by Winklevoss Inc., whose fiscal year is the calendar year:

drek231 [11]

Answer:

1. The journal entry records are the following:

1-jul year 1 Debit Credit

Cash $63,532,267

discount on bonds payable $10,467,733

bonds payable $74,000,000

31-dec year 1 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

31-dec year 1 Debit Credit

Income Summary $4,331,693

Interest expense $4,331,693

30-jun year 2 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

31-dec year 2 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

Income Summary $8,663,386

Interest expense $8,663,386

30-jun year 3 Debit Credit

Bond payable $74,000,000

Loss on redemption $7,940,961

Cash $9,420,961

discount on bonds payable $72,520,000

2. a. The amount of the interest expense in Year 1 is $4,331,693

b. The amount of the interest expense in Year 2 is $8,663,386

3. The carrying amount of the bonds as of December 31, Year 2 is $64,317,346.

Explanation:

First, to journalize the entry record for 1-jul of year 1 we have to calculate the discount on bonds payable as follows:

discount on bonds payable=$74,000,000-$63,532,267=$10,467,733

1. Therefore, journal for entry record for 1-jul of year 1 is:

1-jul year 1 Debit Credit

Cash $63,532,267

discount on bonds payable $10,467,733

bonds payable $74,000,000

To journalize the entry record for 31 decl of year 1 we have to calculate the cash as follows:

Cash=$74,000,000×11%×1/2

Cash=$4,070,000

Therefore, journal for entry record for 31-dec of year 1 is:

31-dec year 1 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

31-dec year 1 Debit Credit

Income Summary $4,331,693

Interest expense $4,331,693

To journalize the entry record for 30 jun of year 2 we have to calculate the cash as follows:

Cash=$74,000,000×11%×1/2

Cash=$4,070,000

Therefore, journal for entry record for 30-jun of year 2 is:

30-jun year 2 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

journal for entry record for 31-dec of year 2 is:

31-dec year 2 Debit Credit

Interest expense $4,331,693

discount on bonds payable $261,693

Cash $4,070,000

31-dec year 2 Debit Credit

Income Summary $8,663,386

Interest expense $8,663,386

Journal for entry record for 30-jun of year 3 is:

30-jun year 3 Debit Credit

Bond payable $74,000,000

Loss on redemption $7,940,961

Cash $9,420,961

discount on bonds payable $72,520,000

a. The amount of the interest expense in Year 1 is $4,331,693

b. The amount of the interest expense in Year 2= interest expense on bonds payable June 30+interest expense on bonds payable Dec 31=$4,331,693+$4,331,693=$8,663,386

3. The carrying amount of the bonds as of December 31, Year 2=Issue price of bonds-discount amortized

Discount amortized=$9,420,961- $261,693=$9,682,654

The carrying amount of the bonds as of December 31, Year 2=$74,000,000-$9,682,654=$64,317,346

7 0

3 years ago