Exercise 6-2

Alan Jackson invests $49,600 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money.

Compute the amount Alan would withdraw assuming the investment earns simple interest. *(Round answers to 0 decimal places, e.g. 458,581.)*

Total withdrawn$

Compute the amount Alan would withdraw assuming the investment earns interest compounded annually. *(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)*

Total withdrawn$

Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually. *(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)*

Total withdrawn$

2. Exercise 6-3

Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.)

What is the future value of $7,960 at the end of 7 periods at 8% compounded interest? *(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)*

The future value $

What is the present value of $7,960 due 8 periods hence, discounted at 6%?

The present value$

What is the future value of 17 periodic payments of $7,960 each made at the end of each period and compounded at 10%?

The future value$

What is the present value of $7,960 to be received at the end of each of 19 periods, discounted at 5% compound interest?

The present value$

Exercise 6-6

Presented below are three unrelated situations.

Bonita Company recently signed a lease for a new office building, for a lease period of 12 years. Under the lease agreement, a security deposit of $12,890 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 5% per year.

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What amount will the company receive at the time the lease expires?

The company will receive$

Windsor Corporation, having recently issued a $20,075,700, 15-year bond issue, is committed to make annual sinking fund deposits of $625,000. The deposits are made on the last day of each year and yield a return of 10%.

Will the fund at the end of 15 years be sufficient to retire the bonds?

Future value of an ordinary annuity $

Will funds be sufficient?

Windsor Corporation, having recently issued a $20,075,700, 15-year bond issue, is committed to make annual sinking fund deposits of $625,000. The deposits are made on the last day of each year and yield a return of 10%.

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Determine the amount of deficiency.

Deficiency$

Under the terms of his salary agreement, president John Walters has an option of receiving either an immediate bonus of $71,500, or a deferred bonus of $91,000 payable in 10 years.

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Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?

Present value of deferred bonus$

Accept Deffered Bonus in 10 yearsAccept Bonus Now

Exercise 6-12

The Kingbird Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, Kingbird has decided to locate a new factory in the Panama City area. Kingbird will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following three very similar buildings that will meet their needs.

Building A: Purchase for a cash price of $611,800, useful life 26 years.

Building B: Lease for 26 years with annual lease payments of $70,900 being made at the beginning of the year.

Building C: Purchase for $655,200 cash. This building is larger than needed; however, the excess space can be sublet for 26 years at a net annual rental of $6,230. Rental payments will be received at the end of each year. The Kingbird Inc. has no aversion to being a landlord.

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In which building would you recommend that The Kingbird Inc. locate, assuming a 12% cost of funds?

Net Present Value

Building A

Building B$

Building C$

The Kingbird Inc. should locate itself in Building BBuilding ABuilding C

Exercise 6-13

Shamrock Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,201,000 of 9% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1. First interest payment will be made on September 1, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%.

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As the controller of the company, determine the selling price of the bonds.

Selling price of the bonds$

Exercise 6-14

Concord, Inc. is a furniture manufacturing company with 50 employees. Recently, after a long negotiation with the local labor union, the company decided to initiate a pension plan as a part of its compensation plan. The plan will start on January 1, 2017. Each employee covered by the plan is entitled to a pension payment each year after retirement. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). On the basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance company, the controller develops the following information related to the pension plan.

Average length of time to retirement14 yearsExpected life duration after retirement10 yearsTotal pension payment expected each year after retirement for all employees. Payment made at the end of the year.$829,000 per year

The interest rate to be used is 10%.

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On the basis of the information above, determine the present value of the pension obligation (liability).

The present value of pension obligation (liability)$

Exercise 6-18

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $2,673,000, or it can make annual payments of $347,100 for 15 years, each payment due on the last day of the year.

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Which method of payment do you recommend, assuming an expected effective interest rate of 10% during the future period?

Present Value of annual payments$

Recommended payment method Immediate PaymentAnnual Payments

Exercise 6-21

Morgan Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 3 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 3 years, by conducting some research online, Morgan has developed the following estimates.

Engine Overhaul

Estimated Cash Outflow

$360 $630 $770 $900

Probability

Assessment

10% 30% 50% 10%

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How much should Morgan Bowie deposit today in an account earning 9%, compounded annually, so that he will have enough money on hand in 3 years to pay for the overhaul?

Deposit amount$

Problem 6-7

Answer the following questions related to Stellar Inc.

Stellar Inc. has $611,600 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $85,671 at the end of each year for 11 years, and the other is to receive a single lump-sum payment of $1,744,968 at the end of the 11 years. Which alternative should Stellar select? Assume the interest rate is constant over the entire investment.

Alternative Two or Alternative One

Stellar Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $852,000. The purchase agreement specifies an immediate down payment of $188,400 and semiannual payments of $85,939 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

Interest rate______% semiannually

Stellar Inc. loans money to John Kruk Corporation in the amount of $831,600. Stellar accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Stellar needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Stellar will receive on the sale of the note?

Amount received on sale of note$

Stellar Inc. wishes to accumulate $1,344,000 by December 31, 2027, to retire bonds outstanding. The company deposits $188,400 on December 31, 2017, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,344,000 is available at the end of 2027. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.)

Annuity of value of quarterly deposits$