Time Value of Money

Do the following problems using your financial calculator. Show all your work and complete the register.

1.In 2015, Barrick Gold, a Canadian mining company, adopted a plan to accumulate a remediation fund beginning Aug. 2, 2018 at an estimated cost of $32 million. Barrick plans to make equal semiannual payments into a fund earning 5.2% interested compounded semiannually. The first deposit is scheduled for Aug. 1, 2013. Determine the required semiannual deposit. First determine how many payments Barrick will be making. Assume the last payment is made on Feb. 1, 2018 but the funds are not needed until Aug. 1, 2018. (5 points)

N = I/Y = PV = PMT = FV =

2.Deborah Gianoulis won $6.5 million in the Georgia Lottery. She must choose how she wants her prize to be paid. First, Deborah can elect to receive 26 annual payments, with the first payment due immediately. Second, she can elect to receive a single payment for the entire amount. However, if the single payment option, the winning prize is reduced to 60% of the winning. What rate would make Deborah indifferent about these two options? (10 points)

26 Annual Payments

N = I/Y = PV = PMT = FV =

1 Payment

Amount:

Do the following problems in Excel. Submit your Excel spreadsheet so I can see how you solved the problems (functions you used). Submitting anything other than an Excel spreadsheet will not get you any points.

3.Assume the same facts as in part 1, except on Feb. 1, 2016, due to financial problems, Barrick deposit nothing in the fund. After this date, they resume and make sufficient equal payments to meet their goal of $32 million on Aug. 1, 2018. In other words, they make the same amount of payments in the fund as part 1 from Aug. 1, 2013-Aug. 1, 2018. Determine the first set of required payments and the second set of required payments. (10 points).

4.Barrick is comparing two gold mines.

Mine A: The mine is expected to make $3.5 billion in year 1, $4.5 billion in year 2, and $5.5 billion in years 3-6 and $4.25 billion in years 7-10. At the end of year 10, Barrick will need to spend $202 million on environmental clean-up costs and expects the residual value to be $200 billion.

Mine B: The mine is currently in operation and produces $4.1 billion per year. At the end of 10 years the residual value would be $200 billion and no environmental clean-up costs would be necessary.

Which mine should Barrick buy for $142 billion. (To simplify things, assume Net Income is earned one time per year at the end of the year.) The appropriate discount rate is 6.22% compounded quarterly. (15 points)

Recording Cash Discounts

Schmidt Corp. purchases materials from a supplier that offers credit terms of 2/15, n/60. It purchased 16,500 of merchandise inventory from that supplier on Jan 20, 2019.

a)Assume that Schmidt Corp. paid the invoice on Feb. 1, 2019. Prepare journal entries to record the purchase of the inventory and the cash payment to the supplier using the net-of-discount method.

b)Assume that Schmidt Corp. paid the invoice on Feb. 15, 2019. Prepare journal entries to record the purchase of the inventory and the cash payment to the supplier using the net-of-discount method.

c)Compute the cost of a lost discount as an annual percentage rate.

Account

Debit

Credit

1.

2.

Lost discount as an annual percentage rate.

Gain or Loss on Bond redemption

On April 20, 2018, two years before maturity, Van Gogh Company retires 150,000 of its 5.6% semi-annual bonds payable at the price of 105. The bond book value April 20, 2018 is 155,000, reflecting an unamortized premium. Bond interest is fully paid and recorded up to the date of retirement.

a)What is the gain or loss on retirement of those bonds?

b)What was the market rate of the bond according to the book value? (What rate produces a PV of 155,000 on this 150,000, 5.6% semi-annual bonds with 2 years left?)

Warranty Liability and Expense

Pavo Real sells a sprinkler that carries a 1-year unconditional warranty against product failure. Pavo Real estimates that between the sale and the lapse of the product warranty, 3.2% of the total 250,000 units sold this period will require repair or replacement at a cost of 5.50 per unit. A warranty liability 5,000 is currently on the balance sheet. How much expense must Pavo Real report in its income statement if 1,000 is still needed to cover warranties in the past? What amount of additional warranty liability must it report on its balance sheet for the year?