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Chapter 6: Question 17Q (page 301)

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?

Short Answer

Expert verified

Part a has a present value of annuity due, part b has a present value of 1, part c has a future value of an annuity due, and part D should use the future value of 1 table.

Step by step solution

01

Definition of future value of 1 table

The future value of 1 table shows what the future value of $1 will grow to if invested at the rate mentioned in the column heading and compounded for a number of periods.

02

Appropriate concept for each situation

The present value of an annuity dueis an appropriate concept for the situation in part A.

In part B, the most appropriate concept is the present value of 1.

The future value of an annuity dueis appropriate for part C.

For part D, the future value of 1 table should be used.

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Most popular questions from this chapter

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.)

Danny’s Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2017, Danny sold \(300,000 of new specialty mowers for golf greens for which Danny’s service department does not have the equipment to do the service. Danny has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2017. Danny wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2017. The controller for Danny’s Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2017.

Cash Flow Probability Year Estimate Assessment 2018 \)2,500 20% 4,000 60% 5,000 20% 2019 \(3,000 30% 5,000 50% 6,000 20% 2020 \)4,000 30% 6,000 40% 7,000 30%

Instructions Using expected cash flow and present value techniques determine the value of the warranty liability for the 2017 sales. Use an annual discount rate of 5%. Assume all cash flows occur at the end of the year.

Clancey Inc. issues $2,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Clancey receive when it issues the bonds?

The Black Knights 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, Black Knights has decided to locate a new factory in the Panama City area. Black Knights 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 \(600,000, useful life 25 years. Building B: Lease for 25 years with annual lease payments of \)69,000 being made at the beginning of the year. Building C: Purchase for \(650,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of \)7,000. Rental payments will be received at the end of each year. The Black Knights Inc. has no aversion to being a landlord

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

For each of the following cases, indicate (a) to what rate columns, and (b) to what number of periods you would refer in looking up the interest factor.

1. In a future value of 1 table Annual Number of Rate Years Invested Compounded

a. 9% 9 Annually b. 12% 5 Quarterly c. 10% 15 Semiannually

2. In a present value of an annuity of 1 table Annual Number of Number of Frequency of Rate Years Involved Rents Involved Rents

a. 9% 25 25 Annually b. 10% 15 30 Semiannually c. 12% 7 28 Quarterly
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