Question

a) Indigo Inc. has $581,180 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $77,120 at the end of each year for 12 years, and the other is to receive a single lump-sum payment of $1,823,990 at the end of the 12 years. Which alternative should Indigo select? Assume the interest rate is constant over the entire investment.

b) Indigo Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $791,184. The purchase agreement specifies an immediate down payment of $192,000 and semiannual payments of $73,874 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?

c) Indigo Inc. loans money to John Kruk Corporation in the amount of $768,000. Indigo accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Indigo needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Indigo will receive on the sale of the note? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

d) Indigo Inc. wishes to accumulate $1,248,000 by December 31, 2027, to retire bonds outstanding. The company deposits $192,000 on December 31, 2017, which will earn interest at 8% 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 $1,248,000 is available at the end of 2027. (The quarterly deposits will also earn at a rate of 8%, compounded quarterly.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Answer 1

a.

Let us say the interest rate is 10%

Alternative 1:

Present value = $77,120 * present value of annutiy factor(10%,12)

= $77,120 * 6.813

= $525,418.6

Alternative 2:

Present value = $1,823,990 * Present value of discounting factor(10%,12)

= $1,823,990 * 0.319

= $581,852.8

Hence, Alternative 2 is preffered.

b.

c.

Amount Receivable by Indigo on the sale of the note :

          = 768,000 x 4% PVAF (5%,10) + 768,000 PVIF (5%,10)

           = 768,000 x 4% x 7.72173 + 768,000 x 0.61391

           = 237,211.5456 + 471,482.88

            = $ 708,694    Ans.

Note:

r= 4% ( 8 / 2)

i = 5% (10 / 2)

time= n= 5 x 2 = 10 periods

d.