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Chapter 6: Q7Q (page 301)
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?
The amount at the end of the 3 years will be$26898
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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?
Danny鈥檚 Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2017, Danny sold \(300,000 of new specialty mowers for golf greens for which Danny鈥檚 service department does not have the equipment to do the service. Danny has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2017. Danny wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2017. The controller for Danny鈥檚 Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2017.
Cash Flow Probability Year Estimate Assessment 2018 \)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.
Question:Jose Oliva is considering two investment options for a $1,500 gift he received for graduation. Both investments have 8% annual interest rates. One offers quarterly compounding; the other compounds on a semiannual basis. Which investment should he choose? Why?
Using the appropriate interest table, provide the solution to each of the following four questions by computing the unknowns.
(a) What is the amount of the payments that Ned Winslow must make at the end of each of 8 years to accumulate a fund of \(90,000 by the end of the eighth year, if the fund earns 8% interest, compounded annually?
(b) Robert Hitchcock is 40 years old today and he wishes to accumulate \)500,000 by his sixty-fifth birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his fortieth through his sixty-fourth birthday. What annual deposit must Robert make if the fund will earn 8% interest compounded annually?
(c) Diane Ross has \(20,000 to invest today at 9% to pay a debt of \)47,347. How many years will it take her to accumulate enough to liquidate the debt?
(d) Cindy Houston has a \(27,600 debt that she wishes to repay 4 years from today; she has \)19,553 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?
At the end of 2017, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. Given the nature of Sawyer鈥檚 production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer鈥檚 accountants have developed the following cash flow information for the equipment.
Net Cash Flow Probability Year Estimate Assessment 2018 \(6,000 40% 9,000 60% 2019 \) (500) 20% 2,000 60% 4,000 20% Scrap Value 2019 $ 500 50% 900 50%
Instructions Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2017. Use a 6% discount rate. Assume all cash flows occur at the end of the year.
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