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Chapter 6: Question 10E (page 304)

Consider the following independent situations. (a) Mike Finley wishes to become a millionaire. His money market fund has a balance of \(92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired \)1,000,000? (b) Assume that Sally Williams desires to accumulate \(1 million in 15 years using her money market fund balance of \)182,696. At what interest rate must Sally鈥檚 investment compound annually?

Short Answer

Expert verified

The period required for Mike is 25 years, and the interest rate required for Sally will be 12%.

Step by step solution

01

Calculation of the number of years

Futurevalueof$1=DesiredamountMoneymarketfundbalance=100,00092,296=10.83471

The future value of $1 is 10.83471 at 10% for25 years, per the table

02

Calculation of the interest rate

Futurevalueof$1=DesiredamountMoneymarketfundbalance=100,000182,696=5.47357

The future value of $1 is 5.47357 for 15 years for an interest rate of12%, per the table

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Most popular questions from this chapter

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for \(30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.

The vineyard will bear no grapes for the first 5 years (1鈥�5). In the next 5 years (6鈥�10), Stacy estimates that the vines will bear grapes that can be sold for \)60,000 each year. For the next 20 years (11鈥�30), she expects the harvest will provide annual revenues of \(110,000. But during the last 10 years (31鈥�40) of the vineyard鈥檚 life, she estimates that revenues will decline to \)80,000 per year.

During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at \(9,000; during the years of production, 6鈥�40, these costs will rise to \)12,000 per year. The relevant market rate of interest for the entire period is 6%. Assume that all receipts and payments are made at the end of each year.

Instructions Dick Button has offered to buy Stacy鈥檚 vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

Candice Willis will invest \(30,000 today. She needs \)150,000 in 21 years. What annual interest rate must she earn?

Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy鈥檚 books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.) There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period.

Restoration Estimated Probability Cash Outflow Assessment $15,000 10% 22,000 30% 25,000 50% 30,000 10%

Instructions (a) What is the estimated fair value of Murphy鈥檚 asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.

Johnson Co. accepts a note receivable from a customer in exchange for some damaged inventory. The note requires the customer make semiannual installments of \(50,000 each for 10 years. The first installment begins six months from the date the customer takes delivery of the damaged inventory. Johnson鈥檚 management estimates that the fair value of the damaged inventory is \)679,517.

Accounting

(a) What interest rate is Johnson implicitly charging the customer? Express the rate as an annual rate but assume semiannual compounding.

(b) At what dollar amount do you think Johnson should record the note receivable on the day the customer takes delivery of the damaged inventory?

Analysis

Assume the note receivable for damaged inventory makes up a significant portion of Johnson鈥檚 assets. If interest rates increase, what happens to the fair value of the receivable? Briefly explain why.

Principles

The Financial Accounting Standards Board has issued an accounting standard that allows companies to report assets such as notes receivable at fair value. Discuss how fair value versus historical cost potentially involves a trade-off of one desired quality of accounting information against another.

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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.
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