113) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A
consultant estimates that the rearrangement should result in cash savings of $6,000 the first year,
$10,000 for the next two years, and $12,000 for the next two years. Interest is at 12%. Assume
cash flows occur at the end of the year.
Required: Calculate the total present value of the cash flows.
114) Price Mart is considering outsourcing its billing operations. A consultant estimates that
outsourcing should result in cash savings of $9,000 the first year, $15,000 for the next two years,
and $18,000 for the next two years. Interest is at 12%. Assume cash flows occur at the end of the
year.
Required: Calculate the total present value of the cash flows.
115) Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000.
The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold
at the end of 10 years for $10,000. Interest is at 10%. Assume the machine purchase would be
paid for on the first day of year one, but that all other cash flows occur at the end of the year.
Ignore income tax considerations.
Required: Determine whether Baird should purchase the machine.
116) Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is
expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of
eight years for $5,000. Interest is at 12%. Assume the equipment purchase would be paid for on
the first day of year one, but that all other cash flows occur at the end of the year. Ignore income
tax considerations.
Required: Determine whether Dobson should purchase the machine.
117) Hillsdale is considering two options for comparable computer software. Option A will cost
$25,000 plus annual license renewals of $1,000 for three years, which includes technical support.
Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of
technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year.
Assume the software is purchased and paid for at the beginning of year one, but that technical
support is paid for at the end of each year. Interest is at 8%. Ignore income taxes.
Required: Determine which option should be chosen based on present value considerations.
118) Bison Mfg. is considering two options for purchasing comparable machinery. Machine 1
will cost $27,500 plus an annual maintenance fee of $1,500 per year for four years. Machine 2
will cost $25,000 with maintenance being an add-on charge. The estimated cost of maintenance
is $1,000 the first year, $3,000 the second year, and $4,000 the third year and the fourth year.
Assume the purchase cost is paid the same day as buying the machinery, but that maintenance is
paid for at the end of each year. Interest is at 10%. Ignore income taxes and residual values.
Required: Determine which machine should be chosen based on present value considerations.
119) On May 1, 2018, Bo Smith, proud father of newborn son Bobo, purchased $200,000 in
zero-coupon bonds that mature on May 1, 2038. The bonds pay no interest during the period of
time they are outstanding. The interest rate for such borrowings is at 9%. Interest compounds
annually.
Required: Calculate the price Bo paid for the bonds.
120) On February 1, 2018, Lynda Brown, proud mother of newborn daughter Goldie, purchased
$600,000 in zero-coupon bonds that mature on February 1, 2038. The bonds pay no interest
during the period of time they are outstanding. The interest rate for such borrowings is at 12%.
Required: Calculate the price Lynda paid for the bonds.
121) On the last day of its fiscal year ending December 31, 2018, the Boatright Ship Builders
completed two financing arrangements. The funds provided by these initiatives will allow the
company to expand its operations.
1. Boatright issued 6% stated rate bonds with a face amount of $200 million. The bonds mature
on December 31, 2038 (20 years). The market rate of interest for similar bond issues was 8%
(4% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31,
beginning on June 30, 2019.
2. The company leased two manufacturing facilities. Lease A requires 10 annual lease payments
of $50,000 beginning on January 1, 2019. Lease B also is for 10 years, beginning January 1,
2019. Terms of the lease require seven annual lease payments of $60,000 beginning on January
1, 2022. Accounting standards require both leases to be recorded as liabilities for the present
value of the scheduled payments. Assume that an 8% interest rate properly reflects the time value
of money for the lease obligations.
Required:
What amounts will appear in Boatright’s December 31, 2018, balance sheet for the bonds and for
the leases?
47
122) White & Decker Corporation’s 2018 financial statements included the following
information in the long-term debt disclosure note:
($ in millions)
2018
Zero-coupon subordinated debentures, due 2033: $275
The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity
value of $500 million. The maturity value indicates the amount that White & Decker will pay
bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,000. Zero-
coupon bonds pay no cash interest during the term to maturity. The company is “accreting”
(gradually increasing) the issue price to maturity value using the bonds’ effective interest rate
computed on an annual basis.
Required:
1. Determine the effective interest rate on the bonds.
2. Determine the issue price in late 2013 of a single, $1,000 maturity-value bond.
123) Santa Cruz Oil is obligated to the State of Nevada to restore leased land to its original
condition after its oil drilling activities are completed in four years. The cash flow possibilities
are probabilities for the restoration costs in four years are as follows:
Cash Outflow Probability
$20 million 20%
30 million 40%
40 million 30%
50 million 10%
The company’s risk-free interest rate is 6%.
Required:
Calculate the liability that Santa Cruz must record at the beginning of the project for the
restoration costs.
124) Jackpot Mining is obligated to the State of California to restore leased land to its original
condition after its mining activities are completed in six years. The cash flow possibilities and
probabilities for the restoration costs in six years are as follows:
Cash Outflow Probability
$ 5 million 10%
10 million 30%
12 million 40%
15 million 20%
The company’s risk-free interest rate is 4%.
Required:
Calculate the liability that Jackpot must record at the beginning of the project for the restoration
costs.
125) Incognito Company is contemplating the purchase of a machine that provides it with cash
savings of $80,000 per year for five years. Interest is 8%. Assume the cash savings occur at the
end of each year.
Required: Calculate the present value of the cash savings.
126) Samson Inc. is contemplating the purchase of a machine that will provide it with cash
savings of $100,000 per year for eight years. Interest is 10%. Assume the cash savings occur at
the end of each year.
Required: Calculate the present value of the cash savings.
127) Under the MLB deferred compensation plan, payments made at the end of each year
accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree
to select the amount of the annual payment to be received, and option 2 allows the retiree to
specify over how many years payments are to be received. Assume Sosa has had $5,000
deposited at the end of each year for 40 years, and that the long-term interest rate has been 7%.
Required:
a. How much has accumulated in Sosa’s deferred compensation account?
b. How much will Sosa be able to withdraw at the beginning of each year if he elects
to receive payments for 20 years?
c. For how many years will Sosa be able to receive payments if he chooses to
receive $115,000 per year at the beginning of each year?
128) Under the NBA deferred compensation plan, payments made at the end of each year
accumulate up to retirement and then retirees are given two options. Option 1 allows the retiree
to select the amount of the annual payment to be received, and option 2 allows the retiree to
specify over how many years payments are to be received. Assume Hardaway has had $6,000
deposited at the end of each year for 30 years, and that the long-term interest rate has been 8%.
Required:
a. How much has accumulated in Hardaway’s deferred compensation account?
b. How much will Hardaway be able to withdraw at the beginning of each year if he elects to
receive payments for 15 years?
c. How many years will Hardaway be able to receive payments if he chooses to receive $65,000
per year at the beginning of each year?
129) ABC Company will issue $5,000,000 in 6%, 10-year bonds when the market rate of interest
is 8%. Interest is paid semiannually.
Required: Determine how much cash ABC Company will realize from the bond issue.
130) DEF Company will issue $2,000,000 in 10%, 10-year bonds when the market rate of
interest is 12%. Interest is paid semiannually.
Required: Determine how much cash DEF Company should realize from the bond issue.
131) GHI Company will issue $2,000,000 in 8%, 10-year bonds when the market rate of interest
is 6%. Interest is paid semiannually.
Required: Determine how much cash GHI Company should realize from the bond issue.
132) JKL Company will issue $2,000,000 in 12%, 10-year bonds when the market rate of interest
is 10%. Interest is paid semiannually.
Required: Determine how much cash JKL Company should realize from the bond issue.