EXAM 3 I) Presented below are three unrelated situations. (Round factor values t

Question

EXAM 3 I) Presented below are three unrelated situations. (Round factor values to 3 decimal places, e.g. 1.251 and final answer to 0 decimal places, e.g. 458,581.) a) Larkspur Company recently signed a lease for a new office building, for a lease period of 11 years. U deposit to be returned at the e year. nder the lease agreement, a security deposit of $14,200 is made, with the xpiration of the lease, with interest compounded at 5% per What amount will the company receive at the time the lease expires? 14200 10 24282 Cullumber Corporation, having recently issued a $20,066,900, 15-year bond issue, is committed to make annual sinking fund deposits of $623,400. The deposits are made on the last day of each year and yield a return of 10%. b) Will the fund at the end of 15 years be sufficient to retire the bonds? If the value of the fund is insufficient, what is the deficiency?

Explanation / Answer

1. Amount to be returned at the end of 11 years = 14,200 x (1 + 0.05)11

= 14,200 x 1.710

= $24,282

2. Balance of fund at the end of 15 years will be determined using following formula for future value of annuity:

Future Value of Annuity = P{(1 + r)n - 1} / r

where P = Periodic payments

r = rate per period

n = number of periods

= 623,400 {(1 + 0.1)15 - 1} / 0.1

= 623,400 x 31.772

= 19,806,965

The value of funds at the end of 15 years would be $19,806,965 which would be insuffiicient to retire the bonds amount of $20,066,900.

Amount of Deficiency = $20,066,900 - $19,806,965

= $259,935

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