E 6-6 (Future Value and Present Value Problems) Presented below are three unrela
ID: 2458552 • Letter: E
Question
E 6-6 (Future Value and Present Value Problems) Presented below are three unrelated situations. Dwayne Wade Company recently signed a lease for a new office building, for a lease period of 10 years. Under the lease agreement, a security deposit of $12,000 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 10% per year. What amount will the company receive at the time the lease expires? (b) Serena Williams Corporation, having recently issued a $20 million, 15-year bond issue, is committed to make annual sinking fund deposits of $600,000. The deposits are made on the last day of each year and yield a return of 10%. Will the fund at the end of 15 years be sufficient to retire the bonds? If not, what will the deficiency be? (c) Under the terms of his salary agreement, president Rex Walters has an option of receiving either an immediate bonus of $40,000, or a deferred bonus of $70,000 payable in 10 years. Ignoring tax considerations and assuming a relevant interest rate of 8%, which form of settlement should Walters accept?
Explanation / Answer
Answer No . 1 Dwayne wade Company
Future Value = Present Value * ( 1+ 1.1) ^10
Amount of deposit will receive at the end of lease = $12000 * ( 1+0.1 ) ^10 = $12000 * 2.59374 =$ 31124.88
Answer no .2 Serena Williams Corporation
Periodic Contribution to Sinking Fund =Par Value of Bonds to be Paid off at end of 15 years / ((1 + r)n 1) /r
Par Value of Bonds to be Paid off = $600000 * (( 1+0.1)^15 -1) / 0.1
Par value of Bonds to be paid off = $600000 * 31.72248 = $ 190634890
Deficiency = $20000000 - $ 190634890 = $936512
where ,
n= number of year
r = annual compounding rate of interest
Answer no . 3
Present Value = Future value / ( 1+r ) ^1 = $ 70000 / ( 1+0.08 ) ^10 =$ 32423.50
President rex walter should accept immediate bonus $ 40000 because Present value of deferred bounus $ 32423.5 is less than amount of immediate bonus $40000.
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