Question

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

Answer 1

Part 1 Correct Answer $19033.

Calculations

Year	(A) Opening balance of Deposit	(B) Year Deposits Deposit	(C )Interest on deposit	(A+B+C) Closing Balance
1	$                                                   -	$       19,033.00	$                                -	$    19,033.00
2	$                                   19,033.00	$       19,033.00	$                      951.65	$    39,017.65
3	$                                   39,017.65	$       19,033.00	$                   1,950.88	$    60,001.53

Deposit is done on December 31 so no interest will be earned on first deposit, Interest will be earned at the end of next year.

Interest will be calculated on amount that remains deposited for a whole year.

Part 2 Correct Answer $19000.

Cash From Operations
Cash Collected from Sales	$   130,000.00
Cash Paid For Selling Expenses	$   (15,000.00)
Cash Paid For Inventory Purchase	$   (55,000.00)
Cash Paid For G&A Expenses	$   (19,000.00)
Operating Cash flows	$      41,000.00
Less: Cash Dividends	$      (4,000.00)
Less: Capital Expenditure	$   (18,000.00)
Free cash flow	$      19,000.00

It is assumed that Notes payable is long term liability.