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Chapter 6: Q10Q (page 301)
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.)
The amount paid each year is$13169
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Question:Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.
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?
Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be \(1,000 per year for the first 5 years, \)2,000 per year for the next 10 years, and \(3,000 per year for the last 5 years. Following is each vendor’s sales package.
Vendor A: \)55,000 cash at time of delivery and 10 year-end payments of \(18,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of \)10,000.
Vendor B: Forty semiannual payments of \(9,500 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge.
Vendor C: Full cash price of \)150,000 will be due upon delivery.
Instructions Assuming that both Vendors A and B will be able to perform the required year-end maintenance, Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, from which vendor should the press be purchased?
Recently, Glenda Estes was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either \(27,600 cash or \)6,900 at the end of each of 5 years. Compute the effective-interest rate to the nearest percent that Glenda would pay if she chooses to make the five annual payments.
Killroy Company owns a trade name that was purchased in an acquisition of McClellan Company. The trade name has a book value of \(3,500,000, but according to GAAP, it is assessed for impairment on an annual basis. To perform this impairment test, Killroy must estimate the fair value of the trade name. (You will learn more about intangible asset impairments in Chapter 12.) It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Killroy’s estimate of annual cash flows over the next 8 years. The trade name is assumed to have no salvage value after the 8 years. (Assume the cash flows occur at the end of each year.) Probability Cash Flow Estimate Assessment \)380,000 20% 630,000 50% 750,000 30% Instructions (a) What is the estimated fair value of the trade name? Killroy determines that the appropriate discount rate for this estimation is 8%. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.
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