Exam 6: Time Value of Money Concepts

Samson Inc. is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for eight years. Interest is 10%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at:

Column 6 is an interest table for the:

On the last day of its fiscal year ending December 31, 2013, the Boatright Ship Builders completed two financing arrangements. The funds provided by these initiatives will allow the company to expand its operations. 1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on December 31, 2033 (20 years). The market rate of interest for similar bond issues was 8% (4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on June 30, 2014. 2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments of $50,000 beginning on January 1, 2014. Lease B also is for 10 years, beginning January 1, 2014. Terms of the lease require seven annual lease payments of $60,000 beginning on January 1, 2017. Accounting standards require both leases to be recorded as liabilities for the present value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value of money for the lease obligations. Required: What amounts will appear in Boatright's December 31, 2013, balance sheet for the bonds and for the leases?

Debbie has $368,882 accumulated in a 401K plan. The fund is earning a low, but safe, 3% per year. The withdrawals will take place annually starting today. How soon will the fund be exhausted if Debbie withdraws $30,000 each year?

On January 1, 2013, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2016. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?

On June 30, 2013, Gunderson Electronics issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on June 30, 2033 (20 years). The market rate of interest for similar bond issues was 10% (5% semiannual rate). Interest is paid semiannually (4%) on June 30 and December 31, beginning on December 31, 2013. Required: a. Determine the price of the bonds on June 30, 2013. b. Calculate the interest expense Gunderson reports in 2013 for these bonds.

Column 3 is an interest table for the:

The effective interest rate can be determined by solving for the unknown present value of $1 factor for 15 annual periods (2013-2028):

Mustard's Inc. sold the rights to use one of its patented processes that will result in cash receipts of $2,500 at the end of each of the next four years and a lump sum receipt of $4,000 at the end of the fifth year. The total present value of these payments if interest is at 9% is:

On January 1, 2013, you are considering making an investment that will pay three annual payments of $10,000. The first payment is not expected until December 31, 2015. You are eager to earn 3%. What is the present value of the investment on January 1, 2013?

On October 1, 2013, Justine Company purchased equipment from Napa Inc. in exchange for a noninterest-bearing note payable in five equal annual payments of $500,000, beginning Oct 1, 2014. Similar borrowings have carried an 11% interest rate. The equipment would be recorded at:

GHI Company will issue $2,000,000 in 8%, 10-year bonds when the market rate of interest is 6%. Interest is paid semiannually. Required: Determine how much cash GHI Company should realize from the bond issue.

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year. Required: Calculate the total present value of the cash savings.

Titanic Corporation leased executive limos under terms of $20,000 down and four equal annual payments of $30,000 on the anniversary date of the lease. The interest rate implicit in the lease is 11%. The first year's interest expense would be:

At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

Garland Inc. offers a new employee a lump-sum signing bonus at the date of employment, June 1, 2013. Alternatively, the employee can take $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2017. Assuming the employee's time value of money is 9% annually, what lump sum at employment date would make him indifferent between the two options?

Column 1 is an interest table for the:

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the first of the month, with interest of 12% on the unpaid balance. She should use a table for the:

Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. Interest is at 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Required: Determine if Dobson should purchase the machine.