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The following are the time value of money formulas presented in the instructor notes. Use them as needed to answer the question below. You may also use the time value of money tables found on the last pages of your text. FV = PV * (FVIF, i, n ), FV = PV * (PVIF, i, n ) FVOA = PMT * (FVIFOA , i, n ), PVOA = PMT * (PVIFOA , i, n ) On January 1 a company determines it will need a new computer system costing $60,000 three years from now. It desires to make 3 equal deposits into its bank each of the next three December 31. If the bank is paying 5% interest compounded annually on such deposits, calculate the amount of the deposit that needs to be made at the end of each of the next 3 years. [answers may vary slightly due to rounding]

$22,032

$20,000

$19,033

$19,463

LBO Company reported the following information for its most recent year: Item amount Cash received from issuance of preferred stock $ 50,000 Cash collected on sales to customers 130,000 Cash paid to purchase equipment (18,000) Cash paid for selling expenses (15,000) Cash paid to purchase inventory (55,000) Cash received upon issuance of a note payable 20,000 Cash paid for general & administrative (G&A) expenses (19,000) Cash used to purchase treasury stock (15,000) Cash dividends paid (4,000) Change in cash for the year $ 74,000 Calculate LBO Company’s “free cash flow” for the year. [= net cash flow from operating activities – capital expenditures – cash dividends]

$19,000

$4,000

$74,000

$17,000

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1. On January 1 a company determines it will need a new computersystem costing $60,000 three years from now. It desires to make 3equal deposits into its bank each of the next three December 31. Ifthe bank is paying 5% interest compounded annually on suchdeposits, calculate the amount of the deposit that needs to be madeat the end of each of the next 3 years.

A. $22,032
B. $19,033
C. $20,000
D. $19,463

2. On January 1 a company determines it will need a new computersystem costing $60,000 three years from now. It desires to make asingle deposit into its bank today, January 1, that will grow to$60,000 three years from now. If the bank is paying 5% interestcompounded annually on such deposits calculate the amount of thedeposit that needs to be made today.

A. $57,143
B. $51,831
C. $54,422
D. $49,566

Please provide the value for each component N= , I=, PV=, FV=,etc so I can learn how to do it in the calculator. thank you

Annuity payment for expected Future Value
6. You wish to retire with $5 Million in 38 years. Youestimate you will earn 8% annually on your

investments. How much must you invest each year in order toreach your goal?a) Ordinary (1st payment made at the end of theyear)b) Due (1st payment made today)

7. You would like to withdraw $80,000 per year duringretirement. You expect to live 20 yearsafter you retire at age 65.How much do you need to have saved by the time you retire if youcan

earn 4% on your funds?


Present Value of an Annuity
8. As part of an agreement for investing in a start-upcompany, you will receive $10,000 at the endof each year for thenext 3 years. If the agreed upon interest rate is 15%, what is theamount of

money you are required to invest.

9. Part A) From the sale of your family property, youwill receive $25,000 today and again eachyear for the next 15years. If the discount rate is 7%, compute the present value ofyour future

payments.Part B) Instead of receiving annual payments, you couldreceive $200,000 lump sum. Should youtake the lump sum instead?


Perpetuity
10. You plan to purchase a small service company. Youanticipate receiving annual cash flows of$60,000 per yearindefinitely. (A) If you require an 8% return on your investment,what is themost you should pay for this company? (B) What is theNPV if you can purchase it for $500,000?

You may use your financial calculator or excel for calculationsbut be sure to show your work (i.e. rate, periods, payments, etc.).For the amortization schedules be sure to print the schedule so allcolumns fit on one page. For amortization schedules required forquestion 4 d. and f. only include the first and last pages of eachof the schedules.

1) Chris Hogan just found out he won $1,000,000 from thelottery. He has two options for receiving the prize. First, if hetakes the money today, the state and federal government will takeout 47% immediately. His second option is to receive a payout of 20equal installments of $72,000 with the first payment occurring whenChris turns in the winning ticket. Each of these payments will betaxed at a combined state and federal rate of 27%. Assuming Chriscan earn a 4% rate of return on any money invested during thisperiod, which option should he choose? Why? Show your work.

2)Malcolm Mitchell is the sole proprietor of MitchellEnterprises. He is exploring the option of going publicbecause his company is growing exponentially. The consulting firmthat is reviewing her financials has questioned whether Mitchell’sCFO is technically competent enough to be the CFO of a publicallytraded company, as they believe he made several bad financialdecisions. The two situations, which the firm brings to Malcom’sattention, are as follows:

a) Mitchell purchased the building in which their corporateoffice is housed on 1/1/10 for $7,800,000. They putdown $2,000,000 cash and had to borrow the remaining amount at 8%over a 20-year term. At the time of the purchase, they had theoption to lease the building. The 20-year lease would begin on1/1/10, and called for payments of $600,000 beginning on that datefor the first 10 years and payments of $500,000 beginning on 1/1/20for the remaining 10 years of the lease. Mitchell had the option topurchase the building for $1 on December 31, 2029 at the end of thelease. Did the CFO make the right decision by purchasing thebuilding? Why or why not? Show your work.

b) This year, the company sold land for a non-interest bearingnote. The note calls for annual payments of $10,000 for 4 years.The payments will begin one year from the date of the sale. Anappropriate rate of interest for this type of note is 6%. The landhad an original purchase cost of $25,000. The CFO told theaccounting department to record the sale as follows:

(debit ) Notes Receivable $40,000

(credit) Land $25,000

(credit) Gain on Sale ofLand $15,000

Was this entry correct? If not, provide the correct entry.

3) James White loans Dion Lewis $550,000. White accepts a 4%note, which requires semiannual interest payments for 10 years. Theday after receiving the 4th interest payment, Whitedecides to sell the note to Dedham Savings Bank. Dedham SavingsBank agrees to purchase it to yield a 6% return.

a) What is the amount that James White will receive on the saleof the note to Dedham Savings Bank?

b) Prepare the entries that James White and Dedham Savings Bankwill make on the day the note is sold to the bank.

4) Jacoby Brissett is interested in buying a waterfront vacationhome and has saved $100,000 for the down payment. His plans callfor making additional monthly deposits into an investment accountover the next 12 months. Jacoby Brissett wants to make the purchase18 months from today and wants to have $400,000 saved up for thedown payment.

a) What is the amount of each of the additional payments he mustmake for his plan to work out? Assume Jacoby can earn4% annual return in his investment account.

b) Prepare an amortization schedule proving the answer youcomputed in a. is correct.

c) If Jacoby takes out a 30-year, $800,000 mortgage at 4%, whatwill his mortgage payments be?

d) Prepare an amortization schedule to prove that your answer isright and his mortgage will be paid off in 30 years.

e) Assume he pays an additional $500 towards his mortgage eachmonth. How much sooner will he be able to pay off her mortgage?

f) Prepare an amortization schedule proving your answer ine.

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