Exercise 6-1
Your answer is partially correct. Try again.
For each of the following cases, indicate (a) to what rate columns, and (b) to what number of periods
you would refer in looking up the interest factor.
1. In a future value of 1 table:
Annual
Rate
Number of Years
Invested
Compounded
(a) Rate of
Interest
(b) Number of
Periods
a.
10%
9
Annually
%
b.
12%
6
Quarterly
%
c.
10%
16
Semiannually
%
2. In a present value of an annuity of 1 table:
Number Number
Annual
Frequency
of Years of Rents
Rate
of Rents
Invested Involved
(a) Rate of
Interest
(b) Number
of Periods
a.
9%
29
29
Annually
%
b.
12%
16
32
Semiannually
%
c.
8%
6
24
Quarterly
%
Exercise 6-6 (Part
Level Submission)
Presented below are
three unrelated
situations.
(b1)
Your answer is partially correct. Try again.
Cullumber Corporation, having recently issued a $20,134,100, 15-year bond issue, is committed
to make annual sinking fund deposits of $613,500. The deposits are made on the last day of each
year and yield a return of 10%.
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Will the fund at the end of 15 years be sufficient to retire the bonds?
Future value of an ordinary annuity
$
Will funds be sufficient?
(b2)
Your answer is incorrect. Try again.
Cullumber Corporation, having recently issued a $20,134,100, 15-year bond issue, is committed to
make annual sinking fund deposits of $613,500. The deposits are made on the last day of each
year and yield a return of 10%.
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Determine the amount of deficiency. (Round factor values to 5 decimal places, e.g. 1.25124
and final answer to 0 decimal places, e.g. 458,581.)
Deficiency
$
Exercise 6-11 (Part Level Submission)
Indigo Excavating Inc. is purchasing a bulldozer. The equipment has a price of $92,800. The
manufacturer has offered a payment plan that would allow Indigo to make 6 equal annual
payments of $20,074.07, with the first payment due one year after the purchase.
(a)
Your answer is incorrect. Try again.
How much total interest will Indigo pay on this payment plan? (Round factor values to 5
decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Total interest
$
Problem 6-3
Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 years a vacant lot
next to one of its stores to serve as a parking lot for customers. Management is considering the
following bids involving two different qualities of surfacing for a parking area of 11,200 square yards.
Bid A: A surface that costs $5.50 per square yard to install. This surface will have to be replaced at
the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square
yard for each year except the last year of its service. The replacement surface will be similar to the
initial surface.
Bid B: A surface that costs $10.25 per square yard to install. This surface has a probable useful life of
10 years and will require annual maintenance in each year except the last year, at an estimated cost
of 10 cents per square yard.
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Compute present value of the bids. You may assume that the cost of capital is 10%, that the annual
maintenance expenditures are incurred at the end of each year, and that prices are not expected to
change during the next 10 years. (Round factor values to 5 decimal places, e.g. 1.25124 and
final answer to 0 decimal places, e.g. 458,581.)
Present value of outflows for Bid A
Present value of outflows for Bid B
$
$
Which bid should be accepted by Wal-Mart.
Wal-Mart should accept
.
Problem 6-10
Riverbed 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 Maryland. 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 $1,862,300. An immediate down payment of $417,600 is required, and the
remaining $1,444,700 would be paid off over 5 years at $354,700 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 $505,700. As the owner of the property, the company will have the following out-ofpocket expenses each period.
Property taxes (to be paid at the end of each year)
Insurance (to be paid at the beginning of each year)
$40,880
26,660
Other (primarily maintenance which occurs at the end of each year)
16,950
$84,490
Lease: First National Bank has agreed to purchase the site, construct the building, and install the
appropriate fixtures for Riverbed Inc. if Riverbed will lease the completed facility for 12 years. The
annual costs for the lease would be $249,060. Riverbed would have no responsibility related to the
facility over the 12 years. The terms of the lease are that Riverbed 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 $108,700 is required when the store is opened. This deposit
will be returned at the end of the 12th year, assuming no unusual damage to the building structure or
fixtures.
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Compute the present value of lease vs purchase. (Currently, the cost of funds for Riverbed Inc.
is 9%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal
places, e.g. 458,581.)
Lease
Present value
Purchase
$
$
Which of the two approaches should Riverbed Inc. follow?
Riverbed Inc. should
the facilities
Brief Exercise 5-8
Included in Sandhill Company’s December 31, 2017, trial balance are the following accounts: Accounts
Payable $221,400, Pension Liability $380,600, Discount on Bonds Payable $31,100, Unearned Rent
Revenue $43,600, Bonds Payable $406,600, Salaries and Wages Payable $29,000, Interest Payable
$13,460, and Income Taxes Payable $30,460.
Prepare the current liabilities section of the balance sheet.
SANDHILL COMPANY
Balance Sheet (Partial)
$
$
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