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Chapter 6: Question 16BE (page 304)
Zach Taylor is settling a \(20,000 loan due today by making 6 equal annual payments of \)4,727.53. Determine the interest rate on this loan, if the payments begin one year after the loan is signed.
If the payments begin one year after the loan is signed, the interest rate will be 11%.
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Henry Quincy wants to withdraw $30,000 each year for 10 years from a fund that earns 8% interest. How much must he invest today if the first withdrawal is at year-end? How much must he invest today if the first withdrawal takes place immediately?
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.
Recently, Glenda Estes was interested in purchasing a Honda Acura. The salesperson indicated that the price of the car was either \(27,600 cash or \)6,900 at the end of each of 5 years. Compute the effective-interest rate to the nearest percent that Glenda would pay if she chooses to make the five annual payments.
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.
Adams Inc. will deposit $30,000 in a 6% fund at the end of each year for 8 years beginning December 31, 2017. What amount will be in the fund immediately after the last deposit?
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