ACC 421 Week Five (Week 5)
Problem 6-7 (P6-7) (Time Value Concepts Applied to Solve Business Problems) Answer the following questions related to Derek Lee Inc.
(a) Derek Lee Inc. has $572,000 to invest. The company is trying to
decide between two alternative uses of the funds. One alternative
provides $80,000 at the end of each year for 12 years, and the other is
to receive a single lump sum payment of $1,900,000 at the end of the 12
years. Which alternative should Lee select? Assume the interest rate is
constant over the entire investment.
(b) Derek Lee Inc. has completed the purchase of new Dell computers.
The fair market value of the equipment is $824,150. The purchase
agreement specifies an immediate down payment of $200,000 and semiannual
payments of $76,952 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) Derek Lee Inc. loans money to John Kruk Corporation in the amount
of $600,000. Lee accepts an 8% note due in 7 years with interest payable
semiannually. After 2 years (and receipt of interest for 2 years), Lee
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 Lee will receive on the sale of the note?
(d) Derek Lee Inc. wishes to accumulate $1,300,000 by December 31,
2017, to retire bonds outstanding. The company deposits $300,000 on
December 31, 2007, which will earn interest at 10% 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 $1,300,000 is available at the end of 2017. (The
quarterly deposits will also earn at a rate of 10%, compounded
quarterly.) (Round to even dollars.)
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