Grand Canyon acc370 week 4 assignment

E6-4 (Computation of Future Values and Present Values)Using the appropriate interest table, answer the following questions. (Each case is independent of the others).

(a)What is the future value of 20 periodic payments of $4,000 each made at the beginning of each period and compounded at 8%?

(b)What is the present value of $2,500 to be received at the beginning of each of 30 periods, discounted at 10% compound interest?

(c)What is the future value of 15 deposits of $2,000 each made at the beginning of each period and compounded at 10%? (Future value as of the end of the fifteenth period.)

(d)What is the present value of six receipts of $1,000 each received at the beginning of each period, discounted at 9% compounded interest?

E6-7 (Computation of Bond Prices)What would you pay for a $50,000 debenture bond that matures in

15 years and pays $5,000 a year in interest if you wanted to earn a yield of:

(a) 8%?(b)10%?(c)12%?

E6-12 (Analysis of Alternatives)The Black Knights Inc., a manufacturer of low-sugar, low-sodium, low-cholesterol TV dinners, would like to increase its market share in the Sunbelt. In order to do so, Black Knights has decided to locate a new factory in the Panama City area. Black Knights will either buy or lease a site depending upon which is more advantageous. The site location committee has narrowed down the available sites to the following three buildings.

Building A:Purchase for a cash price of $600,000, useful life 25 years.

Building B:Lease for 25 years with annual lease payments of $69,000 being made at the beginning of the year.

Building C:Purchase for $650,000 cash. This building is larger than needed; however, the excess space can be sublet for 25 years at a net annual rental of $7,000. Rental payments will be received at the end of each year. The Black Knights Inc. has no aversion to being a landlord.

Instructions

In which building would you recommend that The Black Knights Inc. locate, assuming a 12% cost of funds?

P6-7 (Time Value Concepts Applied to Solve Business Problems)Answer the following questions related to Dubois Inc.

(a)Dubois Inc. has $600,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $80,000 at the end of each year for 12 years, and the other is to receive a single lump-sum payment of $1,900,000 at the end of the 12 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment.

(b)Dubois Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $824,150. The purchase agreement specifies an immediate down payment of $200,000 and semiannual payments of $76,952 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

(c)Dubois Inc. loans money to John Kruk Corporation in the amount of $800,000. Dubois accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Dubois needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Dubois will receive on the sale of the note?

(d)Dubois Inc. wishes to accumulate $1,300,000 by December 31, 2024, to retire bonds outstanding. The company deposits $200,000 on December 31, 2014, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,300,000 is available at the end of 2024. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)

P6-10 (Analysis of Lease vs. Purchase)Dunn Inc. owns and operates a number of hardware stores in the

New England region. Recently, the company has decided to locate another store in a rapidly growing area of

. The company is trying to decide whether to purchase or lease the building and related facilities.

Purchase:The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,850,000. An immediate down payment of $400,000 is required, and the remaining $1,450,000 would be paid off over 5 years at $350,000 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $500,000. As the owner of the property, the company will have the following out-of-pocket expenses each period.

Property taxes (to be paid at the end of each year) $40,000

Insurance (to be paid at the beginning of each year) 27,000

Other (primarily maintenance which occurs at the end of each year) 16,000

$83,000

Lease:First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Dunn Inc. if Dunn will lease the completed facility for 12 years. The annual costs for the lease would be $270,000. Dunn would have no responsibility related to the facility over the 12 years. The terms of the lease are that Dunn would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $100,000 is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming no unusual damage to the building structure or fixtures.

Instructions

Which of the two approaches should Dunn Inc. follow? (Currently, the cost of funds for Dunn Inc. is 10%.)

P6-14 (Expected Cash Flows and Present Value)At the end of 2014, 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’s production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer’s accountants have developed the following cash flow information for the equipment.

Net Cash Flow Probability

Year Estimate Assessment

2015 $6,000 40%

9,000 a 60%

2016 $ (500) 20%

2,000 60%

4,000 20%

Scrap value

2016 $500 50%

900 50%

Instructions

Using expected cash flow and present value techniques, determine the fair value of the machinery at the end of 2014. Use a 6% discount rate. Assume all cash flows occur at the end of the year.