Brief Exercise 12-3 Thunder Corporation, an amusement park, is considering a cap
ID: 2497118 • Letter: B
Question
Brief Exercise 12-3
Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It will be sold for $60,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $25,000. The company’s borrowing rate is 8%. Its cost of capital is 10%. Click here to view PV table.
Calculate the net present value of this project to the company and determine whether the project is acceptable. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, e.g. 125.)
Explanation / Answer
The following information is provided regarding a company's pension plan:
Service cost $ 640,000
Projected benefit obligation, Jan. 1 4,500,000
Fair value plan assets, Jan. 1 3,750,000
Amortization of unrecognized prior service cost for the year 250,000
Interest cost 8%
Employer contribution to fund 845,000
Expected (and actual) return on plan assets 10%
What is pension expense?
Answer: Pension expense is 875,000
What are the steps and formulas for this problem?
Current Service cost $ 640,000
+Interest Cost
-Expected Return on Plan Assets
+(or)-Amortization of Past Service Cost(Benefit) 250,000
+(or)-Amortization of Acturial losses(Benefit)
=Pension Expense
Year
Cash Flow
PV Factor @ 10%
PV
1
25,000
0.90909
22,727.27273
2
25,000
0.82645
20,661.15702
3
25,000
0.75131
18,782.87002
4
25,000
0.68301
17,075.33638
5
25,000
0.62092
15,523.03308
Salvage Value
5
60,000
0.56447
33,868.43580
Total PV
128,638.10504
Less
Initial Investment
136,000.00000
Net Present Value
-7,361.89496
As NPV is not negative projected is not be
The following information is provided regarding a company's pension plan:
Service cost $ 640,000
Projected benefit obligation, Jan. 1 4,500,000
Fair value plan assets, Jan. 1 3,750,000
Amortization of unrecognized prior service cost for the year 250,000
Interest cost 8%
Employer contribution to fund 845,000
Expected (and actual) return on plan assets 10%
What is pension expense?
Answer: Pension expense is 875,000
What are the steps and formulas for this problem?
Current Service cost $ 640,000
+Interest Cost
-Expected Return on Plan Assets
+(or)-Amortization of Past Service Cost(Benefit) 250,000
+(or)-Amortization of Acturial losses(Benefit)
=Pension Expense
Year
Cash Flow
PV Factor @ 10%
PV
1
25,000
0.90909
22,727.27273
2
25,000
0.82645
20,661.15702
3
25,000
0.75131
18,782.87002
4
25,000
0.68301
17,075.33638
5
25,000
0.62092
15,523.03308
Salvage Value
5
60,000
0.56447
33,868.43580
Total PV
128,638.10504
Less
Initial Investment
136,000.00000
Net Present Value
-7,361.89496
As NPV is not negative projected cannot be accepted.
Year
Cash Flow
PV Factor @ 10%
PV
1
25,000
0.90909
22,727.27273
2
25,000
0.82645
20,661.15702
3
25,000
0.75131
18,782.87002
4
25,000
0.68301
17,075.33638
5
25,000
0.62092
15,523.03308
Salvage Value
5
60,000
0.56447
33,868.43580
Total PV
128,638.10504
Less
Initial Investment
136,000.00000
Net Present Value
-7,361.89496
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