LeMond Company is a manufacturer of cycling equipment in the United States. The
ID: 2616817 • Letter: L
Question
LeMond Company is a manufacturer of cycling equipment in the United States. The company is considering several decisions that involve time value of money considerations
a) LeMond recently signed a lease for a new office building for a period of 10 years. Under the lease agreement, a security deposit of $12,000 is made, with the deposit to be returned at the expiration of the lease. Interest will be compounded annually at 5 percent each year. What amount will the company receive at the time the lease expires?
b) Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's bicycles. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,000,000 of 11 percent corporate bonds on April 1, 2019, due on April 1, 2033. Interest is payable annually on April 1 each year. At the time the bonds were issued, the market interest rate for similar financial securities is 10 percent. Determine the selling price of the bonds.
c) The company, having issued the bonds in part (b), is committed to make annual sinking fund deposits of $90,000. The deposits are made on the last day of each year and yield a return on 10 percent. Will the fund at the end of 15 years be sufficient to retire the bonds? If not, what is the amount of the deficiency? d) LeMond has 50 full time employees. Recently the company decided to initiate a pension plan as part of its employee compensation package. The pension plan will start on January 1, 2019. As required by accounting standards, the controller of the company needs to report the pension obligation (liability). The following estimates have been collected: Average length of time to retirement 15 years Expected life duration after retirement 10 years Total pension payment expected each year after retirement for all employees $800,000 annually On the basis of the information above, determine the present value of the pension liability. Assume the payment is made at the end of the year and the interest rate is 8 percent.
Average length of time to retirement 15 years
Expected life duration after retirement 10 years
Total pension payment expected each year
after retirement for all employees $800,000 annually
On the basis of the information above, determine the present value of the pension liability. Assume the payment is made at the end of the year and the interest rate is 8 percent.
Explanation / Answer
Ans (a) The deposit is to made 12000$
interest rate compounded anually 5%
therefore amount received after 10 years =
12000(1+.05)10 = 12000(1.6289) = 19546.74$
Ans (B) The selling price of the bonds. = 330000 * PVAF(10% , 14 years ) + 3000000 * PVF (10% , 14th year)
= 330000 ( 7.366) + 3000000 ( 0.2633) = 2431006.86 + 789993.76 = 3221000
Ans (c) The value of sinking Fund after 15 years in start to deposit at the end of year is
90000{1+FVAF ( r , n-1 } = 90000{1+ FVAF(10% , 14 years ) }
= 90000 + 90000( 29.672) = 2670480+90000 = 2760480
No the fund will not be sufficient and the deficiency is 3221000 - 2760480 = 460520
Ans (d) Total pension payment after retirement each year = 800000 anually for 10 years
therefore PV on the date of retirement = 800000 (PVAF 8% , 10 years ) =
= 800000 ( 6.71) = 5368065.12$
and the present value of this today is 5368065.12 ( PVF 8%, 15 years ) =
PV of pension liability today = 5368065.12*0.31524 = 1692238 $
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