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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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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?
You have been hired as a benefit consultant by Jean Honore, the owner of Attic Angels. She wants to establish a retirement plan for herself and her three employees. Jean has provided the following information. The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50% of Jean’s last-year annual salary and 40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of retirement. Jean wishes to fund the plan by making 15 annual deposits beginning January 1, 2017. Invested funds will earn 12% compounded annually. Information about plan participants as of January 1, 2017, is as follows.
Jean Honore, owner: Current annual salary of \(48,000; estimated retirement date January 1, 2042.
Colin Davis, flower arranger: Current annual salary of \)36,000; estimated retirement date January 1, 2047.
Anita Baker, sales clerk: Current annual salary of \(18,000; estimated retirement date January 1, 2037.
Gavin Bryars, part-time bookkeeper: Current annual salary of \)15,000; estimated retirement date January 1, 2032.
In the past, Jean has given herself and each employee a year-end salary increase of 4%. Jean plans to continue this policy in the future.
Instructions
(a) Based upon the above information, what will be the annual retirement benefit for each plan participant? (Round to the nearest dollar.) (Hint: Jean will receive raises for 24 years.)
(b) What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.)
(c) What is the amount of each annual deposit Jean must make to the retirement plan?
Question:The Kellys are planning for a retirement home. They estimate they will need $200,000 4 years from now to purchase this home. Assuming an interest rate of 10%, what amount must be deposited at the end of each of the 4 years to fund the home price? (Round to two decimal places.)
Question:Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.
Answer the following questions related to Dubois Inc.
(a) Dubois Inc. has \(600,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides \)80,000 at the end of each year for 12 years, and the other is to receive a single lump-sum payment of \(1,900,000 at the end of the 12 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment.
(b) Dubois Inc. has completed the purchase of new Dell computers. The fair value of the equipment is \)824,150. The purchase agreement specifies an immediate down payment of \(200,000 and semiannual payments of \)76,952 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?
(c) Dubois Inc. loans money to John Kruk Corporation in the amount of \(800,000. Dubois accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Dubois needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Dubois will receive on the sale of the note?
(d) Dubois Inc. wishes to accumulate \)1,300,000 by December 31, 2027, to retire bonds outstanding. The company deposits \(200,000 on December 31, 2017, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that \)1,300,000 is available at the end of 2027. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)
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