Exercise A3-23 Installment Sale Use Present Value Tables or your calculator to c

Question

Exercise A3-23 Installment Sale Use Present Value Tables or your calculator to complete the requirements below Wilke Properties owns land on which natural gas wells are located. Cincinnati Gas Company signs a note to buy this land from Wilke on January 1, 2020. The note requires Cincinnati to pay Wilke $775,000 per year for 25 years. The first payment is to be made on December 31, 2020. The appropriate interest rate is 9% compounded annually. Required: 1. Complete the information needed to prepare a diagram of the appropriate cash flows from Cincinnati Gas's perspective. If an amount is zero, enter "O". lanuary 1 s to be made on Decemr,from years % per year Amount of Payment or Deposit 1/1/20 12/31/20 12/31/21 12/31/22 12/31/44 2. Determine the present value of the payments. Round your answer to the nearest cent . Indicate what entry Cincinnati Gas should make at January 1, 2020 January 1, 2020 (Record purchase of land)

Explanation / Answer

Solution A 3-23 - 1:

n = 25 years

i = 9%

Solution 2:

Present value of payments = $775,000 * Cumulative PV Factor at 9% for 25 periods

= $775,000 * 9.82258 = $7,612,499.19

Solution 3:

Amount of payment or deposit 1-Jan-20 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-44 $0.00 $775,000.00 $775,000.00 $775,000.00 $775,000.00

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