c06BExercises.

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B EXERCISES
(Interest rates are per annum unless otherwise indicated.)
3 E6-1B (Using Interest Tables) For each of the following cases, indicate (a) to what rate columns, and (b)
to what number of periods you would refer in looking up the interest factor.
1. In a future value of 1 table:

Annual Number of
Rate Years Invested Compounded
a. 8% 8 Annually
b. 16% 10 Quarterly
c. 10% 10 Semiannually

2. In a present value of an annuity of 1 table:

Annual Number of Number of Frequency

Rate Years Involved Rents Involved of Rents
a. 8% 25 25 Annually
b. 12% 15 30 Semiannually
c. 16% 7 28 Quarterly

2 5 E6-2B (Simple and Compound Interest Computations) Ho invests $10,000 at 8% annual interest, leav-
ing the money invested without withdrawing any of the interest for 10 years. At the end of the 10 years,
Ho will withdraw the accumulated amount of money.

Instructions
(a) Compute the amount Ho would withdraw assuming the investment earns simple interest.
(b) Compute the amount Ho would withdraw assuming the investment earns interest compounded
annually.
(c) Compute the amount Ho would withdraw assuming the investment earns interest compounded
semiannually.
5 6 E6-3B (Computation of Future Values and Present Values) Using the appropriate interest table, answer
each of the following questions. (Each case is independent of the others.)
7
(a) What is the future value of $14,000 at the end of 5 periods at 6% compounded interest?
(b) What is the present value of $14,000 due 8 periods hence, discounted at 10%?
(c) What is the future value of 15 periodic payments of $14,000 each made at the end of each period
and compounded at 8%?
(d) What is the present value of $14,000 to be received at the end of each of 20 periods, discounted at
12% compound interest?
6 7 E6-4B (Computation of Future Values and Present Values) Using the appropriate interest table, answer
the following questions. (Each case is independent of the others).
(a) What is the future value of 20 periodic payments of $12,000 each made at the beginning of each
period and compounded at 6%?
(b) What is the present value of $7,500 to be received at the beginning of each of 30 periods, discounted
at 8% compound interest?
(c) What is the future value of 15 deposits of $6,000 each made at the beginning of each period and
compounded at 8%? (Future value as of the end of the fifteenth period.)
(d) What is the present value of six receipts of $3,000 each received at the beginning of each period,
discounted at 10% compounded interest?
7 E6-5B (Computation of Present Value) Using the appropriate interest table, compute the present values
of the following periodic amounts due at the end of the designated periods.
(a) $50,000 receivable at the end of each period for 8 periods, compounded at 10%.
(b) $50,000 payments to be made at the end of each period for 16 periods at 8%.
(c) $50,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 10%.
5 6 E6-6B (Future Value and Present Value Problems) Presented below are three unrelated situations.
7 (a) Sugarland Company recently signed a lease for a new office building, for a lease period of 20 years.
Under the lease agreement, a security deposit of $20,000 is made, with the deposit to be returned

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2 • Chapter 6 Accounting and the Time Value of Money

at the expiration of the lease, with interest compounded at 5% per year. What amount will the com-
pany receive at the time the lease expires?
(b) Overland Corporation, having recently issued a $30 million, 10-year bond issue, is committed to
make annual sinking fund deposits of $2,000,000. The deposits are made on the last day of each
year and yield a return of 6%. Will the fund at the end of 10 years be sufficient to retire the bonds?
If not, what will the deficiency be?
(c) Under the terms of his salary agreement, president Jose Rodriguez has an option of receiving
either an immediate bonus of $50,000, or a deferred bonus of $80,000 payable in 10 years. Ignor-
ing tax considerations, and assuming a relevant interest rate of 6%, which form of settlement should
Rodriquez accept?
8 E6-7B (Computation of Bond Prices) What would you pay for a $500,000 debenture bond that matures
in 20 years and pays $50,000 a year in interest if you wanted to earn a yield of:
(a) 8%? (b) 10%? (c) 12%?
8 E6-8B (Computations for a Retirement Fund) Hoang, a super salesman contemplating retirement on his
fifty-fifth birthday, decides to create a fund on a 10% basis that will enable him to withdraw $60,000 per
year on June 30, beginning in 2018 and continuing through 2021. To develop this fund, Hoang intends to
make equal contributions on June 30 of each of the years 2014–2017.
Instructions
(a) How much must the balance of the fund equal on June 30, 2017, in order for Hoang to satisfy his
objective?
(b) What are each of Hoang’s contributions to the fund?
5 E6-9B (Unknown Rate) HSU Company purchased a machine at a price of $200,000 by signing a note
payable, which requires a single payment of $246,420 in 2 years. Assuming annual compounding of in-
terest, what rate of interest is being paid on the loan?
5 E6-10B (Unknown Periods and Unknown Interest Rate) Consider the following independent situations.
(a) Jafri wishes to accumulate $2 million. His money market fund has a balance of $184,592 and has
a guaranteed interest rate of 10%. How many years must Jafri leave that balance in the fund in
order to get his desired $2,000,000?
(b) Assume that Jones desires to accumulate $2 million in 15 years using her money market fund of
$365,392. At what interest rate must Jones’s investment compound annually?
7 E6-11B (Evaluation of Purchase Options) Loh Excavating Inc. is purchasing a bulldozer. The equipment
has a price of $300,000. The manufacturer has offered a payment plan that would allow Loh to make 10
equal annual payments of $48,823.59, with the first payment due one year after the purchase.
Instructions
(a) How much total interest will Loh pay on this payment plan?
(b) Loh could borrow $300,000 from its bank to finance the purchase at an annual rate of 9%. Should
Loh borrow from the bank or use the manufacturer’s payment plan to pay for the equipment?
5 6 E6-12B (Analysis of Alternatives) Bandit Inc., manufactures ice tea and would like to increase its mar-
ket share in the North. In order to do so, Bandit has decided to locate a new factory in the Cedar Rapid
7 area. Bandit 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 buildings.
Building A: Purchase for a cash price of $1,500,000, useful life 25 years.
Building B: Lease for 25 years with annual lease payments of $125,000 being made at the beginning of
the year.
Building C: Purchase for $1,750,000 cash. This building is larger than needed; however, the excess space
can be sublet for 25 years at a net annual rental of $21,000. Rental payments will be received at the end
of each year. Bandit Inc. has no aversion to being a landlord.
Instructions
In which building would you recommend that Bandit Inc. locate, assuming a 8% cost of funds?
8 E6-13B (Computation of Bond Liability) Loyd Inc. manufactures cycling equipment. Recently the vice
president of operations of the company has requested construction of a new plant to meet the increasing
demand for the company’s bikes. After a careful evaluation of the request, the board of directors has de-
cided to raise funds for the new plant by issuing $5,000,000 of 11% term corporate bonds on March 1,
2014, due on March 1, 2029, with interest payable each March 1 and September 1. At the time of issuance,
the market interest rate for similar financial instruments is 8%.
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B Exercises • 3

Instructions
As the controller of the company, determine the selling price of the bonds.
8 E6-14B (Computation of Pension Liability) Luu, Inc. is a furniture manufacturing company with 50 em-
ployees. Recently, after a long negotiation with the local labor union, the company decided to initiate a
pension plan as a part of its compensation plan. The plan will start on January 1, 2014. Each employee
covered by the plan is entitled to a pension payment each year after retirement. As required by account-
ing standards, the controller of the company needs to report the pension obligation (liability). On the
basis of a discussion with the supervisor of the Personnel Department and an actuary from an insurance
company, the controller develops the following information related to the pension plan.
Average length of time to retirement 15 years
Expected life duration after retirement 10 years
Total pension payment expected each year after retirement
for all employees; payment made at the end of the year $2,800,000 per year
The interest rate to be used is 8%.
Instructions
On the basis of the information above, determine the present value of the pension obligation (liability).
5 6 E6-15B (Investment Decision) John Jacob just received a signing bonus of $525,000. His plan is to invest
this payment in a fund that will earn 4%, compounded annually.
Instructions
(a) If Jacob plans to establish a charitable foundation once the fund grows to $1,000,000, how many
years until he can establish the foundation?
(b) Instead of investing the entire $525,000, Lee invests $200,000 today and plans to make 6 equal an-
nual investments into the fund beginning one year from today. What amount should the payments
be if Jacob plans to establish the $1,000,000 foundation at the end of 6 years?
6 7 E6-16B (Retirement of Debt) Mejia borrowed $200,000 on March 1, 2013. This amount plus accrued in-
terest at 10% compounded semiannually is to be repaid March 1, 2023. To retire this debt, Mejia plans to
contribute to a debt retirement fund five equal amounts starting on March 1, 2018, and for the next four
years. The fund is expected to earn 8% per annum.
Instructions
How much must Mejia contribute each year to provide a fund sufficient to retire the debt on March 1,
2023?
7 E6-17B (Computation of Amount of Rentals) Your client, Miller Leasing Company, is preparing a con-
tract to lease a machine to Molinar Corporation for a period of 25 years. Miller has an investment cost of
$250,000 in the machine, which has a useful life of 25 years and no salvage value at the end of that time.
Your client is interested in earning a 10% return on its investment and has agreed to accept 25 equal rental
payments at the end of each of the next 25 years.
Instructions
Provide Miller with the amount of each of the 25 rental payments that will yield a 10% return on investment.
5 7 E6-18B (Least Costly Payoff) Assume that Muhammed Corporation has a contractual debt outstand-
ing. Muhammed has available two means of settlement: It can either make immediate payment of
$1,500,000, or it can make annual payments of $200,000 for 10 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 6% dur-
ing the future period?
5 7 E6-19B (Least Costly Payoff) Assuming the same facts as those in E6-18B except that the payments
must begin now and be made on the first day of each of the 10 years, what payment method would you
recommend?
9 E6-20B (Expected Cash Flows) For each of the following, determine the expected cash flows.
Probability
Cash Flow Estimate Assessment
(a) $2,800 30%
6,400 40%
8,500 30%
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4 • Chapter 6 Accounting and the Time Value of Money

(b) $3,400 40%

7,100 50%
7,400 10%
(c) $(1,000) 20%
3,000 70%
4,000 10%

9 E6-21B (Expected Cash Flows and Present Value) Jim Bowie is trying to determine the amount to set
aside so that he will have enough money on hand in 4 years to overhaul the engine on his vintage truck.
While there is some uncertainty about the cost of engine overhauls in 4 years, by conducting some re-
search online, Jim has developed the following estimates.
Engine Overhaul Probability
Estimated Cash Outflow Assessment
$ 500 10%
1,200 25%
2,000 50%
2,500 15%

Instructions
How much should Jim Bowie deposit today in an account earning 4%, compounded annually, so that he
will have enough money on hand in 4 years to pay for the overhaul?
9 E6-22B (Fair Value Estimate) Sam Houston Company owns a trade name that was purchased in an ac-
quisition of Travis Company. The trade name has a book value of $10,000,000, but according to GAAP, it
is assessed for impairment on an annual basis. To perform this impairment test, Houston must estimate
the fair value of the trade name. (You will learn more about intangible asset impairments in Chapter 12.)
It has developed the following cash flow estimates related to the trade name based on internal informa-
tion. Each cash flow estimate reflects Houston’s estimate of annual cash flows over the next 6 years. The
trade name is assumed to have no residual value after the 6 years. (Assume the cash flows occur at the
end of each year.)
Probability
Cash Flow Estimate Assessment
$1,000,000 30%
1,600,000 50%
2,100,000 20%

Instructions
(a) What is the estimated fair value of the trade name? Houston determines that the appropriate dis-
count rate for this estimation is 4%. Round calculations to the nearest dollar.
(b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.