Chapter 6: Question 4BE (page 302)
Bo Newman will invest \(10,000 today in a fund that earns 5% annual interest. How many years will it take for the fund to grow to \)17,100?
The funds will take 11 years to grow to $17100.
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Question: Kehoe, Inc. owes $40,000 to Ritter Company. How much would Kehoe have to pay each year if the debt is retired through four equal payments (made at the end of the year), given an interest rate on the debt of 12%? (Round to two decimal places.)
Alexander Enterprises leases property to Hamilton, Inc. Because Hamilton is experiencing financial difficulty, Alexander agrees to receive five rents of $20,000 at the end of each year, with the rents deferred 3 years. What is the present value of the five rents discounted at 12%?
Henry Quincy wants to withdraw $30,000 each year for 10 years from a fund that earns 8% interest. How much must he invest today if the first withdrawal is at year-end? How much must he invest today if the first withdrawal takes place immediately?
Dunn Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities.
Purchase: The company can purchase the site, construct the building, and purchase all store fi xtures. The cost would be \(1,850,000. An immediate down payment of \)400,000 is required, and the remaining \(1,450,000 would be paid off over 5 years at \)350,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for \(500,000. As the owner of the property, the company will have the following outof-pocket expenses each period.
Property taxes (to be paid at the end of each year) \)40,000
Insurance (to be paid at the beginning of each year) 27,000
Other (primarily maintenance which occurs at the end of each year) 16,000
\(83,000
Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fi xtures for Dunn Inc. if Dunn will lease the completed facility for 12 years. The annual costs for the lease would be \)270,000. Dunn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Dunn would be required to make 12 annual payments (the fi rst payment to be made at the time the store opens and then each following year). In addition, a deposit of $100,000 is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming no unusual damage to the building structure or fixtures.
Instructions Which of the two approaches should Dunn Inc. follow? (Currently, the cost of funds for Dunn Inc. is 10%.)
Answer the following questions. (a) On May 1, 2017, Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2017. What present value concept is appropriate for this situation? (b) On June 1, 2017, Seymour Inc. purchased a new machine that it does not have to pay for until June 1, 2019. The total payment on June 1, 2019, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? (c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of \(35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation? (d) Megan Hoffman invests in a “jumbo” \)200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?
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