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Chapter 6: Question 12BE (page 302)
Maria Alvarez is investing $300,000 in a fund that earns 4% interest compounded annually. What equal amounts can Maria withdraw at the end of each of the next 20 years?
Maria can withdraw $22,075 at the end of each of the next 20 years.
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Steve Madison needs $250,000 in 10 years. How much must he invest at the end of each year, at 5% interest, to meet his needs?
Your client, Keith Moreland Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 25 years. Moreland has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years.
Instructions You are requested to provide Moreland with the amount of each of the 25 rental payments that will yield an 11% return on investment.
Question: Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.
Presented below are three unrelated situations.
(a) Dwayne Wade Company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of \(12,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 5% per year. What amount will the company receive at the time the lease expires?
(b) Serena Williams Corporation, having recently issued a \)20 million, 15-year bond issue, is committed to make annual sinking fund deposits of \(600,000. The deposits are made on the last day of each year and yield a return of 10%. Will the fund at the end of 15 years be sufficient to retire the bonds? If not, what will the deficiency be?
(c) Under the terms of his salary agreement, president Rex Walters has an option of receiving either an immediate bonus of \)55,000, or a deferred bonus of $70,000 payable in 10 years. Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept?
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?
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