Please show all work Page 1 NOTE: Be sure to support all your answers with clear

Question

Please show all work
Page 1 NOTE: Be sure to support all your answers with clearly presented addition, be sure to labeled calculations (use extra pages if necessary.) In a note they type of p e they type of problem you are solving: e.g., PV of Single Sum, ll answers totb orda (or annuity due), FV of ordinary Round all answers to the nearest dollar. Single Sum, PV of ordinary annuity annuity ( or annuity due). of 1) The Gardeni $40,000,000 compounded semi-annually a Company needs to have a plant expansion fund with a total amount in 10 years. The fund is expected to earn interest at an annual rate of 8%. termine the amount that should be invested today to achieve the accumulation of $40,000,000 in ten years. 2) On December 31, 20x1 the McCartney Company provided musical recording services for the Starr Company. possible for its services; the company does not need a cash payment immediately. Starr The McCartney Company would like to earn as much as Company offered McCartney Company several different forms of payment, as follows: a) A non-interest bearing note for $300,000 due on December 31, 20x4. b) Three annual payments of $95,000, with the first payment occurring on December 31, 20x2. c) A 2%, $280,000 note due on December 31, 20x4. Interest payments would be made on December 31, 20x2, December 31, 20x3, and December 31, 20x4. The fair value of the services is not known and the notes are not readily marketable. Underthe current circumstances, McCartney recently had to pay 4% interest for money that it borrowed; Starr Company was recently charged 6% interest on money that it borrowed REQUIRED: Which alternative method of payment should McCartney choose? your answer with appropriate calculations. Support

Explanation / Answer

1. Calculation of Investment required today to accumulate $40,000,000 in 10 years.

Rate of Interest = 8%

Payment terms = semi annually

Effective rate of return = 8% / 2 = 4%

Cumulative Present Value Factor at 4% interest for 10 years = 1 / (1 + 0.04)1+2+3+........20

CPVF = 13.59

Amount to be invested today = Total amount required / CPVF.

= $40,,000,000 / 13.59 = $2,943,340.69

2. Since McCartney wants to earn as much as possible, it will charge minimum interest rate 4% to be viable to pay off the debt and could earn max 6% from Starr Company. Therefore, company's rate of return would be 6%.

a. Non- interest bearing rate of $300,000 payable on Dec 31, 20X4

Present Value factor at 6% interest for 3rd year = 1 / (1 + 0.06)3 = 0.8396

Present Value of $300,000 note = $300,000 x 0.8396 = $251,880

b. Annual Payment of $95,000

Cumulative Present Value factor at 6% interest for 3 years = 1 / (1+0.06)1+2+3 = 2.673

Total Present Value of payments = $95,000 x 2.673 = $253,935

c. $280,000 interest bearing note due on Dec 31, 2014

Interest Income per year = $280,000 x 2% = $5,600

Cumulative Present Value factor at 6% interest for 3 years = 1 / (1+0.06)1+2+3 = 2.673

Present Value factor at 6% interest for 3rd year = 0.8396

Present Value of Future cash flows = ($5,600 x 2.673) + (280,000 x 0.8396)

= $250,056.8

Since the present value of cash inflows is highest in case of , McCartney company should accept alternative b of receiving annual payment of $ 95,000

3. a. Total Accumulation needed = $150,000 x 25 withdrawls = $3,750,000

b. Calculation of total fund she will be able to gather

Cumulative Present value annuity factor for 40years @ 5% = 1 / (1 + 0.05)1+2+3+.....+40 = 17.1591

Present Value of Total fund = $20,000 x 17.1591 = $343,181.72

Shortage of Fund = $3,750,000 - 343,182 = $3,406,818

c. Calculation of Amount required to each year = 3,750,000 / 17.1591 = $213,177.19

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.