Acc/421 WK1 problem p6-7b

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P6-7B

(Time Value Concepts Applied to Solve Business Problems)

Answer the following questions related to Purple Cloud Inc.

(a)

Purple Cloud Inc. has \$500,000 to invest. The company is trying to decide between two alterna-

tive uses of the funds. One alternative provides \$65,000 at the end of each year for 10 years, and

the other is to receive a single lump-sum payment of \$900,000 at the end of the 10 years. Which

alternative should Purple Cloud select? Assume the interest rate is constant over the entire

investment

(b)

Purple Cloud Inc. has completed the purchase of 25 new tractors. The fair value of the equipment is

\$1,450,000. The purchase agreement specifies an immediate down payment of \$290,000 and semian-

nual payments of \$157,606 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)

Purple Cloud Inc. loans money to one of its major suppliers in the amount of \$600,000. Purple Cloud

accepts an 10% note due in 5 years with interest payable semiannually. After 1 year (and receipt of interest

for 1 year), Purple Cloud needs money and therefore sells the note to Fourth National Bank, which

demands interest on the note of 12% compounded semiannually. What is the amount Purple Cloud will

receive on the sale of the note?

(d)

Purple Cloud Inc. wishes to accumulate \$1,800,000 by December 31, 2024, to retire bonds outstand-

ing. The company deposits \$100,000 on December 31, 2014, which will earn interest at 8% com-

pounded 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 \$1,800,000 is

available at the end of 2024. (The quarterly deposits will also earn at a rate of 8%, compounded

quarterly.) (Round to even dollars.)

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