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Exam 6: Time Value of Money Concepts

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Question 51

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On May 1, 2018, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds annually. Required: Calculate the price Bo paid for the bonds.

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$200,000 × 0.17843* ...

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Question 52

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Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.

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PV of future cash flows:
Year Cash Flow ...

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Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the year. Required: Calculate the total present value of the cash flows.

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Present and future value tables of $1 at 9% are presented below. -Ajax Company purchased a five-year certificate of deposit for its building fund in the amount of $220,000. How much should the certificate of deposit be worth at the end of five years if interest is compounded at an annual rate of 9%?

Garland Inc. offers a new employee a single-sum signing bonus at the date of employment, June 1, 2018. Alternatively, the employee can receive $39,000 at the date of employment plus $10,000 each June 1 for five years, beginning in 2022. Assuming the employee's time value of money is 9% annually, what single amount at the employment date would make the options equally desirable?

Briefly explain how you would arrive at the monthly payment for a 48-month loan where the first payment is due one month from the loan date. In your explanation, include the use of present or future value tables.

Quaker State Inc. offers a new employee a single-sum signing bonus at the date of employment. Alternatively, the employee can receive $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?

King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan, which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?

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 purchase 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 whether Dobson should purchase the machine.

White & Decker Corporation's 2018 financial statements included the following information in the long-term debt disclosure note: $\begin{array}{c}\text { (\$ in millions) } \\\frac{2018}{\$ 275}\end{array}$ Zero-coupon subordinated debentures, due 2033: $275 The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity value of $500 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash interest during the term to maturity. The company is "accreting" (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis. Required: 1. Determine the effective interest rate on the bonds. 2. Determine the issue price in late 2013 of a single, $1,000 maturity-value bond.

Yamaha Inc. hires a new chief financial officer and promises to pay him a lump-sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for:

Taylor's tractor-trailer rigs sell for $150,000. A customer wishes to buy a rig on a lease purchase plan over seven years, with the first payment to be made at the inception of the lease. Interest is at 12%. Required: a. Compute the amount of the annual lease payment and the gross amount (total payments) due under the lease. b. Compute the amount of interest income earned by Taylor's for the first year of the lease.

Below are excerpts from time value of money tables for the 8% rate. -Column 2 is an interest table for the:

The company's credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach.

On June 30, 2018, Gunderson Electronics issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on June 30, 2038 (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, 2018. Required: a. Determine the price of the bonds on June 30, 2018. b. Calculate the interest expense Gunderson reports in 2018 for these bonds.

MBI Company's largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%. Required: a. Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease. b. Compute the amount of interest income earned by MBI for the first year of the lease.

The calculation of future value requires the removal of interest.

On January 1, 2018, Shirley Corporation purchased 10% bonds dated January 1, 2018, with a face amount of $10 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Required: Determine the price of the bonds at January 1, 2018.

On September 30, 2018, Truckee Garbage leased equipment from a supplier and agreed to pay $125,000 annually for 15 years beginning September 30, 2019. Generally accepted accounting principles require that a liability be recorded for this lease agreement for the present value of scheduled payments. Accordingly, at inception of the lease, Truckee recorded a $1,214,031 lease liability Required: Determine the interest rate implicit in the lease agreement.