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Chapter 6: Question 14BE (page 302)
Amy Monroe wants to create a fund today that will enable her to withdraw $25,000 per year for 8 years, with the first withdrawal to take place 5 years from today. If the fund earns 8% interest, how much must Amy invest today?
Amy should invest $105,599 today.
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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.
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?
Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company鈥檚 bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Instructions As the controller of the company, determine the selling price of the bonds
Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.) (a) What is the future value of \(7,000 at the end of 5 periods at 8% compounded interest? (b) What is the present value of \)7,000 due 8 periods hence, discounted at 6%? (c) What is the future value of 15 periodic payments of \(7,000 each made at the end of each period and compounded at 10%? (d) What is the present value of \)7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?
Leon Tyler鈥檚 VISA balance is \(793.15. He may pay it off in 12 equal end-of-month payments of \)75 each. What interest rate is Leon paying?
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