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Chapter 6: Q16E (page 305)

Ricky Fowler borrowed $70,000 on March 1, 2015. This amount plus accrued interest at 6% compounded semiannually is to be repaid March 1, 2025. To retire this debt, Ricky plans to contribute to a debt retirement fund five equal amounts starting on March 1, 2020, and for the next 4 years. The fund is expected to earn 5% per annum. Instructions How much must be contributed each year by Ricky Fowler to provide a fund sufficient to retire the debt on March 1, 2025?

Short Answer

Expert verified

The amount which is to be contributed annually will be $29,202.

Step by step solution

01

Calculation of future cash flow

FutureValueofcashflow=Amount脳FVFactor=70,000脳1.80611=$126,427.70

02

Calculation of amount to be contributed annually

Amounttobecontributedannually=FVofcashflowPvFactorofannuity=126,427.704.32948=$29,202

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Most popular questions from this chapter

Craig Brokaw, newly appointed controller of STL, is considering ways to reduce his company鈥檚 expenditures on annual pension costs. One way to do this is to switch STL鈥檚 pension fund assets from First Security to NET Life. STL is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial problems, STL still is committed to providing its employees with good pension and postretirement health benefits.

Under its present plan with First Security, STL is obligated to pay \(43 million to meet the expected value of future pension benefits that are payable to employees as an annuity upon their retirement from the company. On the other hand, NET Life requires STL to pay only \)35 million for identical future pension benefits. First Security is one of the oldest and most reputable insurance companies in North America. NET Life has a much weaker reputation in the insurance industry. In pondering the significant difference in annual pension costs, Brokaw asks himself, 鈥淚s this too good to be true?鈥�

Instructions

Answer the following questions.

(a) Why might NET Life鈥檚 pension cost requirement be $8 million less than First Security鈥檚 requirement for the same future value?

(b) What ethical issues should Craig Brokaw consider before switching STL鈥檚 pension fund assets?

(c) Who are the stakeholders that could be affected by Brokaw鈥檚 decision?

Question: Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of \(2,600,000, or it can make annual payments of \)300,000 for 15 years, each payment due on the last day of the year. Instructions Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?

Question:Regina Henry deposited $20,000 in a money market certificate that provides interest of 10% compounded quarterly if the amount is maintained for 3 years. How much will Regina have at the end of 3 years?

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?
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