Question 1

Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax 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.

Accepted Answer

The answer of Touche Manufacturing is considering a rearrangement of...

Question 2

Suppose that Healdsburg wants to buy back the 7.75% notes on December 31, 2013, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only)?

Accepted Answer

The answer of Suppose that Healdsburg wants to buy back...

Question 3

Suppose that Healdsburg enters into a sales contract with an auto manufacturer on January 1, 2013, to provide tires that cost Healdsburg $18 million to produce. The buyer offers Healdsburg $6 million in cash and agrees to take over the principal payment only on Healdsburg 's 6.55% debt notes. Assume that the going market interest is 7% at the time. What would Healdsburg's gross profit be on the sale?

Accepted Answer

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Question 4

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:
A)Present value of 1.
B)Present value of an ordinary annuity of 1.
C)Present value of an annuity due of 1.
D)Future value of an annuity due of 1.

Accepted Answer

The answer of Tammy wants to buy a car that...

Question 5

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:
A)Multiply $10,500 by the present value of 1.
B)Divide $10,500 by the future value of an ordinary annuity of 1.
C)Divide $10,500 by the present value of an annuity due of 1.
D)Multiply $10,500 by the present value of an ordinary annuity of 1.

Accepted Answer

The answer of First Financial Auto Loan Department wishes to...

Question 6

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.
A)$166,651.
B)$135,252.
C)$203,351.
D)$191,852.

Accepted Answer

The answer of Chancellor Ltd. sells an asset with a...

Question 7

On January 1, 2013, Glanville Company sold goods to Otter Corporation. Otter signed a noninterest-bearing note requiring payment of $15,000 annually for six years. The first payment was made on January 1, 2013. The prevailing rate of interest for this type of note at date of issuance was 8%. Glanville should record sales revenue in January 2013 of:
A)$90,000.
B)$69,343.
C)$74,891.
D)None of the above.

Accepted Answer

The answer of On January 1, 2013, Glanville Company sold...

Question 8

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?
A)$44,035.
B)$40,855.
C)$69,035.
D)$65,855.

Accepted Answer

The answer of Garland Inc. offers a new employee a...

Question 9

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?
A)$15,783,077.
B)$17,045,650.
C)$23,190,400.
D)Cannot be determined from the given information.

Accepted Answer

The answer of Fenland Co. plans to retire $100 million...

Question 10

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:
A)Present value of an annuity of 1.
B)Future value of an annuity due of 1.
C)Present value of an ordinary annuity of 1.
D)Future value of an ordinary annuity of 1.

Accepted Answer

Sandra will be receiving a fixed amount of money at the end of each month over the next 30 years, which makes it an ordinary annuity. To determine the amount of her monthly check, she needs to calculate the present value of the annuity, since she wants to receive the money immediately. Therefore, she should use the present value of an ordinary annuity of 1 table.

Question 11

Compute the future value of the following invested amounts at the specified periods and interest rates.

Accepted Answer

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Question 12

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?
A)$1,667.
B)$1,511.
C)$1,834.
D)None of the above.

Accepted Answer

To calculate the amount of each monthly payment, we need to use the formula for the monthly payment of a loan:

Monthly Payment = P * r * (1 + r)^n / [(1 + r)^n - 1]

Where:
P = the principal amount borrowed
r = the monthly interest rate (annual interest rate divided by 12)
n = the total number of payments (12 in this case)

First, we need to convert the annual interest rate of 18% to a monthly interest rate:

Monthly interest rate = 18% / 12 = 1.5%

Next, we can plug in the values:

Monthly Payment = $20,000 * 1.5% * (1 + 1.5%)^12 / [(1 + 1.5%)^12 - 1]
Monthly Payment = $1,834.14

Therefore, the amount of each monthly payment is $1,834.14, which is closest to option C.

Question 13

Kunkle Company wishes to earn 20% annually on its investments. If it makes an investment that equals or exceeds that rate, it considers it a success. Assume that it invests $2 million and gets $500,000 in return at the end of each year for X years. What is the minimum value of X for which it will consider the investment a success? Assume that it can't invest for fractional parts of a year.
A)4 years.
B)6 years.
C)7 years.
D)9 years.

Accepted Answer

The answer of Kunkle Company wishes to earn 20% annually...

Question 14

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.

Accepted Answer

The answer of DON Corp. is contemplating the purchase of...

Question 15

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

Accepted Answer

The answer of Compute the present value of the following...

Question 16

Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $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?
A)$23,026.
B)$57,737.
C)$62,711.
D)None of the above is correct.

Accepted Answer

The present value of the second option is calculated by discounting the future payments at 10% annually. The present value of $20,000 received at the end of each of the first three years is $49,737. Adding the $8,000 received at the date of employment gives a total present value of $57,737.

Question 17

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: A)Future value of an ordinary annuity of 1. B)Future value of an annuity due of 1. C)Future value of 1. D)Present value of an annuity due of 1.

Accepted Answer

The answer of George Jones is planning on a cruise...

Question 18

Suppose that Healdsburg renegotiates the 8% notes on December 31, 2018, when the going interest rate is 8%. Healdsburg agrees to make 12 equal annual installments, commencing on December 31, 2019, rather than pay the annual interest payments and the $225 million in a lump sum at maturity. What would the annual payments be?

Accepted Answer

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Question 19

The total cash interest payments in 2013 for these notes.

Accepted Answer

The answer of The total cash interest payments in 2013...

Question 20

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?
A)Between 13% and 14%.
B)Between 7% and 8%.
C)Between 5.5% and 6%.
D)Cannot be determined from the given information.

Accepted Answer

To find the interest rate, we need to calculate the present value of the payments made by Koko Company. Using a financial calculator, we get a present value of $49.3 million. 
PV (payment) = $10 million x [1 - 1/(1 + r)^10] / r 
PV (building) = $75 million 
PV (total) = $49.3 million + $75 million = $124.3 million

Using the formula for yield to maturity (YTM) of a bond, we can solve for the interest rate: 
PV = PMT x [1 - 1/(1 + r)^n] / r + FV / (1 + r)^n 
PV = $124.3 million 
PMT = -$10 million (negative because it's a payment) 
FV = 0 
n = 10 
Solving for r, we get approximately 7.23%, which falls within the range of B.

Quiz 6: Time Value of Money Concepts

Suppose that Healdsburg wants to buy back the 7.75% notes on December 31, 2013, (i.e., five years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only)?

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:

First Financial Auto Loan Department wishes to know the payment required at the first of each month on a $10,500, 48-month, 11% auto loan. To determine this amount, First Financial would:

Chancellor Ltd. sells an asset with a $1 million fair value to Sophie Inc. Sophie agrees to make six equal payments, one year apart, commencing on the date of sale. The payments include principal and 6% annual interest. Compute the annual payments.

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?

Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next 30 years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Compute the future value of the following invested amounts at the specified periods and interest rates.

You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments over one year at 18% interest annually. The first payment is due one month from today. What is the amount of each monthly payment?

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

George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

The total cash interest payments in 2013 for these notes.

Koko Company pays $10 million at the beginning of each year for 10 years to Mocha Inc. for a building with a fair value of $75 million. What interest rate is Mocha earning on financing this land sale?

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: