A small industrial contractor purchased a warehouse building for storing equipment and materials that are not immediately needed at construction job sites. The cost of the building was $100,000 and the contractor made an agreement with the seller to finance the purchase over a 5-year period. The agreement stated that monthly payments stated that monthly payments would be made based on a 30-year amortization, but the balance owed at the end of year 5 would be paid in a lump-sum balloon payment. What was the size of the balloon payment if the interest rate on the loan was 6% per year, compounded monthly?
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- The Johnson Chemical Company has justreceived a special subcontracting job from one of itsclients. The two-year project requires the purchaseof a special-purpose painting sprayer of $60,000.This equipment falls into the MACRS five-yearclass. After the subcontracting work is completed,the painting sprayer will be sold at the end of twoyears for $40,000 (actual dollars). The painting system will require an increase of $5,000 in net working capital (for spare-parts inventory, such as spraynozzles). This investment in working capital will befully recovered after the project is terminated. Theproject will bring in an additional annual revenueof $120,000 (today’s dollars), but it is expected toincur an additional annual operating cost of $60,000(today’s dollars). It is projected that, due to inflation, sales prices will increase at an annual rate of5%. (This implies that annual revenues will increaseat an annual rate of 5%.) An annual increase of 4%for expenses and working-capital…On January 1, 2024, Nath-Langstrom Services, Incorporated, a computer software training firm, leased several computers under a two- year operating lease agreement from ComputerWorld Leasing, which routinely finances equipment for other firms at an annual interest rate of 4%. The contract calls for four rent payments of $20,000 each, payable semiannually on June 30 and December 31 each year. • The computers were acquired by ComputerWorld at a cost of $110,000 and were expected to have a useful life of eight years with no residual value. . Both firms record amortization and depreciation semiannually. Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) • Required: 1. Prepare appropriate journal entries recorded by Nath-Langstrom Services for the first year of the lease. 2. Prepare appropriate journal entries recorded by ComputerWorld Leasing for the first year of the lease. Complete this question by entering your…A company that sells has proposed to a small public utility company that it purchase a small electronics computer for $1,000,000 to replace ten calculating machines and their operators. An annual service maintenance contract for the computer will be provided at a cost of $100, 000 per year. One operator will be required at a salary of $110, 000 per year and one programmer at a salary of $160, 000. The estimated economical life of the computer is 10 years. The calculating machines costs $8,000 each when new, 5 years ago, and presently can be sold for $2,000 each. They have an estimated life of 8 years and an expected ultimate trade in value of $1, 000 each. Each calculating machine operator receives $85, 000 per year. Fringe Benefits for all labour cost 8% of annual salary. Annual maintenance cost on the calculating machine has been $500 each. Taxes and insurance on all equipment is 2% of the first cost per year. If capital costs the company about 25%, would you recommend the computer…
- The Ajax Specialty Items Corporation has received a 5-year contract to produce a new product. To do the necessary machining operations, the company is considering two alternatives. Alternative A involves continued use of the currently owned lathe. The lathe was purchased 5 years ago for $20,000. Today the lathe is worth $8,000 on the used machinery market. If this lathe is to be used, special attachments must be purchased at a cost of $3,500. At the end of the 5-year contract, the lathe (with attachments) can be sold for $2,000. Operating and maintenance costs will be $7,000/year if the old lathe is used. Alternative B is to sell the currently owned lathe and buy a new lathe at a cost of $25,000. At the end of the 5-year contract, the new lathe will have a salvage value of $13,000. Operating and maintenance costs will be $4,000/year for the new lathe. Using an annual worth analysis, should the firm use the currently owned lathe or buy a new lathe? Base your analysis on a minimum…Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%.(a) Determine the…An electric company must decide between two options for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dispose of the water by spray irrigation. The landowner will move the pipe around as necessary and maintain the spray nozzles and valves. The previous lease cost $125,000 per year with payments due midway through each year. Now the landowner will require beginning of year payments of $180,000 each year. Option 2, which releases the 50 acre tract of land, involves purchasing a treatment system that will allow the recycling of most of the blowdown water. This system will have an initial cost of $1,600,000 and an AOC of $58,000 per year. However, the company will save $220,000 per year because it will not have to purchase as much make-up water as with option 1. At the end of 5 years, the company will be able to sell the equipment back to the local equipment supplier for 30% of the first cost. If the…
- A construction company is considering acquiring a new earthmover. The purchase price is $105,000, and an additional $28,000 is required to modify the equipment for special use by the company. The equipment falls into the MACRS seven-year classification (the tax life), and it will be sold after five years (the project life) for $55,000. The purchase of the earthmover will have no effect on revenues, but the machine is expected to save the firm $70,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21%. Assume that the initial investment is to be financed by a bank loan at an interest rate of 6% payable annually. Determine the after-tax cash flows by using the generalized cash flow approach and the worth of the investment for this project if the firm's MARR is known to be 11%.Metallic Peripherals, Inc., has received a production contract for a new product. The contract lasts for 5 years. To do the necessary machiningoperations, the firm can use one of its own lathes, which was purchased 3years ago at a cost of $16,000. Today the lathe can be sold for $8,000. In 5years the lathe will have a zero salvage value. Annual operating andmaintenance costs for the lathe are $4,000/year. If the firm uses its own lathe, it must also purchase an additional lathe at a cost of $12,000; its value in 5 years will be $3,000. The new lathe will have annual operating and maintenance costs of $3,500/year. As an alternative, the presently owned lathe can be traded in for $10,000 and a new lathe of larger capacity purchased for a cost of $24,000; its value in 5 years is estimated to be $8,000, and its annual operating and maintenance costs will be $6,000/ year. Solve, a. Use the EUAC cash flow approach. b. Use the EUAC opportunity cost approach.An additional alternative is to…Covidam Company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contract, the Company will be paid $1 million a year. To take up this contract, it would have to invest in new cleaning equipment costing $600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be $300,000 per year and overheads $250,000 per year. The Company will need to invest in net working capital of $350,000. It plans to issue $1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The Company has an existing bank loan of $9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the Company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foreseeable future. The tax rate is 20%. 1. Calculate…
- Tucker Enterprise Inc. is considering a project that requires a numerically controlled (NC) machine for $28,000 (year 0) and plans to use it for five years, after which time it will be scrapped. The allowed depreciation deduction during the first year is $4,000 because the equipment falls into the seven-year MACRS property category. (The first-year depreciation rate is 14.29%.) The cost of the goods produced by this NC machine should include a charge for the depreciation of the machine. Suppose the company estimates the following revenues and expenses, including the depreciation for the first operating year:• Gross income = $50,000• Cost of goods sold = $20,000• Depreciation on the NC machine= $4,000• Operating expenses = $6,000Without the project, the company's taxable income from regular business operations amounts to $20 million, which places the company in the highest tax bracket of 35%. Compute the net income from the project during the first year.Marin Construction Inc. agrees to construct a boat dock at the Smooth Sailing Marina for $32,400. In addition, under the terms of the contract, Smooth Sailing will pay Marin a performance bonus of up to $12,000 based on the timing of completion. The performance bonus will be paid fully if construction is completed by the agreed-upon date. The performance bonus decreases by $2,400 per week for every week beyond the agreed-upon completion date. Marin has constructed a number of boat docks under similar agreements. Marin’s management estimates, that it has a 60% probability of completing the project on time, a 20% probability of completing the project one week late, and a 20% probability of completing the project two weeks late. Management does not believe the project will be more than two weeks late.Determine the transaction price that Marin should compute for this agreement.Johnson Inc. enters into a $300,000 contract for the purchase of customized equipment with Builder Inc. The construction of the equipment is expected to take two years. Johnson Inc. owns the work in process during the two-year period but will not take possession of the equipment until completed. The contractor will bill Johnson monthly for performance completed to date. After year-one, Builder Inc. incurred costs of $120,000 and expects remaining costs to be $108,000. Builder Inc. has billed Johnson $150,000 in total for the year. Johnson has paid $135,000 to Builder Inc. Determine the amount of revenue and expenses that Builder Inc. should recognize in the first year of the contract. a. Revenue Expenses $157,895 $120,000 b. Revenue Expenses $150,000 $114,000 c. Revenue Expenses $78,947 $120,000 d. Revenue Expenses $0 $0 e. Revenue Expenses $150,000 $120,000