• Brad Whitaker just found out he won $2,500,000 from the lottery. He has two options for receiving the prize. First, if he takes the money today, the state and federal government will take out 47% immediately. His second option is to receive a payout of 20 equal installments of $145,000 with the first payment occurring when Brad turns in the winning ticket. Each of these payments will be taxed at a combined state and federal rate of 27%. Assuming Brad can earn a 4% rate of return on any money invested during this period, which option should he choose? Why? Show your work.

ACFI 340 TVM Take Home Quiz Fall 2016 You may use your financial calculator or excel for calculations but be sure to show your work (i.e. rate, periods, payments, etc.). For the amortization schedules be sure to print the schedule so all columns fit on one page. For amortization schedules required for question 4 d. and f. only include the first and last pages of each of the schedules. You are to work independently. This is due on the last day of class (12/13) - I will not accept late quizzes. 1. Brad Whitaker just found out he won $2,500,000 from the lottery. He has two options for receiving the prize. First, if he takes the money today, the state and federal government will take out 47% immediately. His second option is to receive a payout of 20 equal installments of $145,000 with the first payment occurring when Brad turns in the winning ticket. Each of these payments will be taxed at a combined state and federal rate of 27%. Assuming Brad can earn a 4% rate of return on any money invested during this period, which option should he choose? Why? Show your work. 2. Cam Brady is the sole proprietor of Brady Enterprises. He is exploring the option of going public because his company is growing exponentially. The consulting firm that is reviewing his financials has questioned whether Brady's CFO is technically competent enough to be the CFO of a publically traded company, as they believe he made several bad financial decisions. The two situations, which the firm brings to Cam's attention, are as follows: a) Brady purchased the building in which their corporate office is housed on 1/1/15 for $4,600,000. They put down $1,500,000 cash and had to borrow the remaining amount at 5% over a 20-year term. At the time of the purchase, they had the option to lease the building. The 20-year lease would begin on 1/1/15, and called for payments of $450,000 beginning on that date for the first 10 years and payments of $300,000 beginning on 1/1/25 for the remaining 10 years of the lease. La Fleur had the option to purchase the building for $1 on December 31, 2034 at the end of the lease. Did the CFO make the right decision by purchasing the building? Why or why not? Show your work. b) This year, the company sold land for a non-interest bearing note. The note calls for annual payments of $20,000 for 4 years. The payments will begin one year from the date of the sale. An appropriate rate of interest for this type of note is 6%. The land had an original purchase cost of $75,000. The CFO told the accounting department to record the sale as follows: Notes Receivable $80,000 Land $75,000 Gain on Sale of Land $ 5,000 Was this entry correct? If not, provide the correct entry. ACFI 340 TVM Take Home Quiz Fall 2016 3. Brennan Huff loans Dale Doback $500,000. Huff accepts a 4% note, which requires quarterly interest payments for 10 years. The day after receiving the 8th interest payment, Huff decides to sell the note to Blue Hills Bank. Blue Hills Bank agrees to purchase it to yield a 7% return. a. What is the amount that Brennan Huff will receive on the sale of the note to Blue Hills Bank? b. Prepare the entries that Brennan Huff and Blue Hills Bank will make on the day the note is sold to the bank. 4. Detective Allen Gamble is interested in buying a waterfront vacation home and has saved $300,000 for the down payment. His plans call for making additional monthly deposits into an investment account over the next 12 months. Allen Gamble wants to make the purchase 18 months from today and wants to have $400,000 saved up for the down payment. a. What is the amount of each of the additional payments he must make for his plan to work out? Assume Allen can earn 4% annual return in his investment account. b. Prepare an amortization schedule proving the answer you computed in a. is correct. c. If Allen takes out a 30-year, $1,200,000 mortgage at 3.5%, what will his mortgage payments be? d. Prepare an amortization schedule to prove that your answer is right and his mortgage will be paid off in 30 years. e. Assume he pays an additional $500 towards his mortgage each month. How much sooner will he be able to pay off her mortgage? f. Prepare an amortization schedule proving your answer in e. 5. In textbook problem 6-1, letters a and c, which we did in class together, there was a note exchanged for property. The difference between the face amount of the note and the present value of the note, we recorded as a discount. Where in the codification does it tell us this is the appropriate way to record the transaction. Reference only