Question

In: Accounting

Sarasota Inc. has completed the purchase of new Dell computers. The fair value of the equipment...

Sarasota Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $1,054,912. The purchase agreement specifies an immediate down payment of $256,000 and semiannual payments of $98,498 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction?

Interest rate

% semiannually

Sarasota Inc. wishes to accumulate $1,664,000 by December 31, 2027, to retire bonds outstanding. The company deposits $256,000 on December 31, 2017, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,664,000 is available at the end of 2027. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Annuity of value of quarterly deposits

$

Solutions

Expert Solution

Question 1 -

Fair Value is the present value of equipment which is the sum of present value of future cash flows at discount rate (i.e. Interest Rate) for n periods.

Fair Value of Equipment = $1,054,912

Semi Annual Interest Rate = R

Number of payments = 5 Years * 2 in a year = 10

Fair Value of Equipment $1,054,912 = Down Payment $256,000 + Semi annual payments $98,498 * Present Value Annuity Interest Factor at R rate and for 10 periods i.e. PVIFA (R, 10)

$1,054,912 - $256,000 = $98,498 * PVIFA (R, 10)

$798,912 = $98,498 * PVIFA (R, 10)

PVIFA (R, 10) = $798,912 / 98,498 = 8.11095

Looking to the table of Present value interest factor of an (ordinary) annuity of $1 per period at i% for n periods, PVIFA(i, n), 8.1109 or 8.111 is coming at 4% interest rate for 10 periods

Hence, the interest rate is 4% semi annual

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Request you to please ask separate question for next problem

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Mariot Inc. trades its old equipment for new equipment with a $4,800 fair value. Mariot paid...
Mariot Inc. trades its old equipment for new equipment with a $4,800 fair value. Mariot paid $2,800 cash on the exchange. Original cost of old equipment $4,000 Accumulated depreciation on old equipment 3,200 If the transaction has commercial substance, what amount does Mariot assign to the new equipment?
Jefferson Inc. is in the process of negotiating a lease of equipment with a fair value...
Jefferson Inc. is in the process of negotiating a lease of equipment with a fair value of $200,000 and must determine the proper lease classification. The following table describes four scenarios under negotiation. 1 2 3 4 Ownership Transfer No No No No Lease term (years) 8 10 8 8 Asset’s useful life (years) 12 12 12 12 Asset’s fair value $200,000 $200,000 $200,000 $200,000 Purchase option that is reasonably certain to be exercised? No No $40,000 No Alternative use...
XYZ Inc is considering the purchase of a new machine for the production of computers.  Machine A...
XYZ Inc is considering the purchase of a new machine for the production of computers.  Machine A costs $6,500,000 and will last for 6 years. Variable costs are 20% of sales and fixed costs are $850,000 per year. Machine B costs $11,000,000 and will last for 10 years. Variable costs for the machine are 15% of sales and fixed costs are $1,000,000 per year. The sales for each machine will be $5,000,000 per year. The required rate of return is 10%,...
Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment...
Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment would be depreciated by the straight-line method over its 4-year life, and would have a $10,000 salvage value. Accounts payable will rise by $5,000 at time 0 but will be recovered at the end of the project’s life. Revenues and annual operating costs are expected to be constant over the project's 4-year life. The other information is shown below. Risk-adjusted WACC 12.0% Equipment purchase...
Stanton exchanged its old equipment for a new equipment:               Book Value     Fair Value       Cash Paid Case I &nbs
Stanton exchanged its old equipment for a new equipment:               Book Value     Fair Value       Cash Paid Case I  $300,000         $340,000         $60,000 Case II $200,000         $180,000         $28,000 Stanton records the following items in Case I (with and without C.S.)?             Record the new equipment at:                                  Record a gain of (loss) of: Stanton records the following items in Case II (with and without C.S.)?             Record the new equipment at:                                  Record a gain of (loss) of:
The value of goodwill is the excess of The purchase price over the fair value of...
The value of goodwill is the excess of The purchase price over the fair value of tangible and identifiable intangible net assets acquired. The purchase price over the fair value of tangible net assets acquired. The purchase price over the carrying value of tangible and identifiable intangible net assets acquired. The purchase price over the carrying value of tangible net assets acquired.
Net Present Value/Uncertain Cash Flows Tiger Computers, Inc., of Singapore is considering the purchase of an...
Net Present Value/Uncertain Cash Flows Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $800,000.  An additional $550,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below: Annual Reduction in Costs   Labor costs $140,000   Material costs $96,000 The new machine would require considerable maintenance work to keep...
Net Present Value/Uncertain Cash Flows Tiger Computers, Inc., of Singapore is considering the purchase of an...
Net Present Value/Uncertain Cash Flows Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $800,000. An additional $550,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below: Annual Reduction in Costs   Labor costs $140,000   Material costs $96,000 The new machine would require considerable maintenance work to...
A company is considering the purchase of new equipment for its production area. The equipment has...
A company is considering the purchase of new equipment for its production area. The equipment has an initial cost of $ 3,000 with operation and maintenance costs, as well as the market liquidation value as shown in the following table: Year Costs of operation Rescue value 1 $1,000 $1,500 2 $1,700 $1,000 3 $2,400 $500 4 $3,100 $0 Determine the Optimal Economic Life of this investment, if the MARR of the company is 12%
Eggs Inc. is considering the purchase of new equipment that will allow them to collect a...
Eggs Inc. is considering the purchase of new equipment that will allow them to collect a loose head feathers for sale. the equipment will cost $465,000 it will be eligible for 100% bonus depreciation the equipment can be sold for $69,000 at the end of the project in five years sales would be $307,000 per year with annual fix cost of $55,000 and variable cost equals 36% of sales the project would require an investment of $41,000 in NWC that...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT