Problem 6-7

Answer the following questions related to Vaughn Inc.

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Vaughn Inc. has $640,500to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $89,719at the end of each year for11years, and the other is to receive a single lump-sum payment of $1,827,423at the end of the11years. Which alternative should Vaughn select? Assume the interest rate is constant over the entire investment.

Alternative One or Alternative Two

Vaughn Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $770,400. The purchase agreement specifies an immediate down payment of $214,400and semiannual payments of $68,550beginning at the end of6months for5years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

Interest rate

__

% semiannually

Vaughn Inc. loans money to John Kruk Corporation in the amount of $819,200. Vaughn accepts an8% note due in7years with interest payable semiannually. After2years (and receipt of interest for2years), Vaughn needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of10% compounded semiannually. What is the amount Vaughn will receive on the sale of the note?(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Amount received on sale of note

$_____

Vaughn Inc. wishes to accumulate $1,216,200by December 31, 2027, to retire bonds outstanding. The company deposits $214,400on December 31, 2017, which will earn interest at10% compounded 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 for10years to ensure that $1,216,200is available at the end of 2027. (The quarterly deposits will also earn at a rate of10%, compounded quarterly.)(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Annuity of value of quarterly deposits

$___

Problem 6-10

Wildhorse 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 $1,856,200. An immediate down payment of $412,400is required, and the remaining $1,443,800would be paid off over5years at $352,100per year (including interest payments made at end of year). The property is expected to have a useful life of12years, and then it will be sold for $504,200. As the owner of the property, the company will have the following out-of-pocket expenses each period.

Property taxes (to be paid at the end of each year)

$41,190

Insurance (to be paid at the beginning of each year)

27,020

Other (primarily maintenance which occurs at the end of each year)

16,190

$84,400

Lease:First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Wildhorse Inc. if Wildhorse will lease the completed facility for12years. The annual costs for the lease would be $266,670. Wildhorse would have no responsibility related to the facility over the12years. The terms of the lease are that Wildhorse would be required to make12annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $105,500is required when the store is opened. This deposit will be returned at the end of the12thyear, 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 Wildhorse Inc. is10%.)(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Lease

Purchase

Present value

$

$

Which of the two approaches should Wildhorse Inc. follow?

Wildhorse Inc. should

lease or purchase

the facilities

Problem 6-11

You have been hired as a benefit consultant by Jean Honore, the owner of Splish Angels. She wants to establish a retirement plan for herself and her three employees. Jean has provided the following information. The retirement plan is to be based upon annual salary for the last year before retirement and is to provide50% of Jean's last-year annual salary and40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for20years from the date of retirement. Jean wishes to fund the plan by making15annual deposits beginning January 1, 2017. Invested funds will earn11% compounded annually. Information about plan participants as of January 1, 2017, is as follows.

Jean Honore, owner: Current annual salary of $50,610; estimated retirement date January 1, 2042.

Colin Davis, flower arranger: Current annual salary of $36,190; estimated retirement date January 1, 2047.

Anita Baker, sales clerk: Current annual salary of $20,480; estimated retirement date January 1, 2037.

Gavin Bryars, part-time bookkeeper: Current annual salary of $15,020; estimated retirement date January 1, 2032.

In the past, Jean has given herself and each employee a year-end salary increase of4%. Jean plans to continue this policy in the future.

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Based upon the above information, what will be the annual retirement benefit for each plan participant? (Hint:Jean will receive raises for24years.)(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Annual Retirement Benefit

Jean Honore

$

Colin Davis

$

Anita Baker

$

Gavin Bryars

$

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What amount must be on deposit at the end of15years to ensure that all benefits will be paid?(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The amount must be on deposit

$

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What is the amount of each annual deposit Jean must make to the retirement plan?(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The amount of each annual deposit

$

Problem 6-13

Leon's Lawn Equipment sells high-quality lawn mowers and offers a3-year warranty on all new lawn mowers sold. In 2017, Leon sold $271,700of new specialty mowers for golf greens for which Leon's service department does not have the equipment to do the service. Leon has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2017. Leon wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2017. The controller for Leon's Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2017.

Year

Cash Flow

Estimate

Probability

Assessment

2018

$2,730

20%

4,290

60%

4,920

20%

2019

$2,940

30%

5,260

50%

5,570

20%

2020

$3,790

30%

5,560

40%

7,610

30%

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Using expected cash flow and present value techniques, determine the value of the warranty liability for the 2017 sales. Use an annual discount rate of5%. Assume all cash flows occur at the end of the year.(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The value of the warranty liability for the 2017 sales

Problem 6-15

Culver Mining Company recently purchased a quartz mine that it intends to work for the next10years. According to state environmental laws, Culver must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Culver must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Culver's books.

There is no active market for retirement obligations such as these, but Culver has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take3years to restore the mine site when mining operations cease in10years. Each estimated cash outflow reflects an annual payment at the end of each year of the3-year restoration period.

Restoration

Estimated

Cash Outflow

Probability

Assessment

$14,650

10%

23,600

30%

26,960

50%

31,490

10%

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What is the estimated fair value of Culver's asset retirement obligation? Culver determines that the appropriate discount rate for this estimation is5%.(Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Estimated fair value of Culver's asset retirement obligation

$