1. 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 loca-tion committee has narrowed down the available sites to the following three very similar buildings that will meet their needs.

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?

2.Ricky Fowler borrowed $70,000 on March 1, 2015. This amount plus accrued interest at 6% compounded semiannually is to be repaid March 1, 2025. To retire this debt, Ricky plans to contribute to a debt retirement fund five equal amounts starting on March 1, 2020, and for the next 4 years. The fund is expected to earn 5% per annum.

Instructions How much must be contributed each year by Ricky Fowler to provide a fund sufficient to retire the debt on March 1, 2025?

3.Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $2,600,000, or it can make annual payments of $300,000 for 15 years, each payment due on the last day of the year. Instructions

Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?

4.Julia Baker died, leaving to her husband Brent an insurance policy contract that provides that the beneficiary (Brent) can choose any one of the following four options.

(a) $55,000 immediate cash. (

b) $4,000 every 3 months payable at the end of each quarter for 5 years.

(c) $18,000 immediate cash and $1,800 every 3 months for 10 years, payable at the beginning of each 3-month period.

(d) $4,000 every 3 months for 3 years and $1,500 each quarter for the following 25 quarters, all payments payable at the end of each quarter.

Instructions

If money is worth 212% per quarter, compounded quarterly, which option would you recommend that Brent exercise?

5.(Purchase Price of a Business) During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1-5). In the next 5 years (6-10), Stacy estimates that the vines will bear grapes that can be sold for $60,000 each year. For the next 20 years (11-30), she expects the harvest will provide annual revenues of $110,000. But during the last 10 years (31-40) of the vineyard's life, she estimates that revenues will decline to $80,000 per year. During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6-40, these costs will rise to $12,000 per year. The relevant market rate of interest for the entire period is 6%. Assume that all receipts and payments are made at the end of each year.

Instructions

Dick Button has offered to buy Stacy's vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?