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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 Rate||Number of Years Invested||Compounded||(a) Rate of Interest||(b) Number of Periods|
- In a present value of an annuity of 1 table:
|Annual Rate||Number of Years Invested||Number of Rents Involved||Frequency of Rents||(a) Rate of Interest||(b) Number of Periods|
Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers. Management is considering the following bids involving two different qualities of surfacing for a parking area of 11,200 square yards.
Bid A: A surface that costs $5.50 per square yard to install. This surface will have to be replaced at the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square yard for each year except the last year of its service. The replacement surface will be similar to the initial surface.
Bid B: A surface that costs $10.25 per square yard to install. This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year, at an estimated cost of 10 cents per square yard.
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Compute present value of the bids. You may assume that the cost of capital is 10%, that the annual maintenance expenditures are incurred at the end of each year, and that prices are not expected to change during the next 10 years. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
|Present value of outflows for Bid A||$|
|Present value of outflows for Bid B||$|
Which bid should be accepted by Wal-Mart.
|Wal-Mart should accept|
Bid A Bid B
Riverbed 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 $1,862,300. An immediate down payment of $417,600 is required, and the remaining $1,444,700 would be paid off over 5 years at $354,700 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $505,700. 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)||$40,880|
|Insurance (to be paid at the beginning of each year)||26,660|
|Other (primarily maintenance which occurs at the end of each year)||16,950|
Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Riverbed Inc. if Riverbed will lease the completed facility for 12 years. The annual costs for the lease would be $249,060. Riverbed would have no responsibility related to the facility over the 12 years. The terms of the lease are that Riverbed would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $108,700 is required when the store is opened. This deposit will be returned at the end of the 12th year, 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 Riverbed Inc. is 9%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Which of the two approaches should Riverbed Inc. follow?
|Riverbed Inc. should|
Brief Exercise 5-8
Included in Sandhill Company’s December 31, 2017, trial balance are the following accounts: Accounts Payable $221,400, Pension Liability $380,600, Discount on Bonds Payable $31,100, Unearned Rent Revenue $43,600, Bonds Payable $406,600, Salaries and Wages Payable $29,000, Interest Payable $13,460, and Income Taxes Payable $30,460.
Prepare the current liabilities section of the balance sheet.
Balance Sheet (Partial)
December 31, 2017 For the Year Ended December 31, 2017 For the Quarter Ended December 31, 2017
|Current Assets Current Liabilities Intangible Assets Long-term Investments Long-term Liabilities Property, Plant and Equipment Stockholders’ Equity Total Assets Total Current Assets Total Current Liabilities Total Intangible Assets Total Investments Total Liabilities Total Liabilities and Stockholders’ Equity Total Long-term Liabilities Total Property, Plant and Equipment Total Stockholders’ Equity|
|Current Assets Current Liabilities Intangible Assets Long-term Investments Long-term Liabilities Property, Plant and Equipment Stockholders’ Equity Total Assets Total Current Assets Total Current Liabilities Total Intangible Assets Total Investments Total Liabilities Total Liabilities and Stockholders’ Equity Total Long-term Liabilities Total Property, Plant and Equipment Total Stockholders’ Equity||$|