Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter M, Problem 16P
To determine
Identify the plan which will provide the smallest present value.
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1. Samos Excavating is considering purchasing some new equipment for the company. Due to the expense involved, the
equipment company is giving Samos the option of choosing among four different payments plans.
1) $500,000 due immediately in cash
2) $150,000 down payment due immediately; $60,000 per year for 10 years, beginning at the end of the current year
3) $150,000 down payment due immediately; $30,000 per year for 4 years beginning at the end of the current year;
$80,000 per year for 8 years beginning at the end of the fourth year after the initial purchase
4) $65,000 due immediately and at the beginning of each of the next 11 years
Required:
Samos will select the payment plan with the lowest present value. The effective interest rate during the future periods is
10%.
Which
option
should
Samos
choose?
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Question 1
A construction firm must obtain a bulldozer to work on a long-term project. There are two options available to the firm - using a loan to purchase the bulldozer for $825,000 and
leasing it from the equipment dealer. If the firm decides to purchase, it can finance the entire cost through a commercial bank for 8 years at an interest rate of 7.5% compounded
annually. At the end of eight years, the firm will sell the bulldozer for a salvage value of $80,000. If the firm decides to lease, it will pay the equipment dealer an up-front fee equal to
5% of the purchase price, followed by eight annual payments of $135,000. At the end of the lease, the firm will return the equipment to the dealer. The firm's discount rate is 10%.
a) Build an Excel worksheet to model the two options and help the firm decide which to choose. You can ignore depreciation or tax effects in your analysis (i.e., evaluate the options
simply based on their respective cash flows).
b) Assuming that the equipment…
Chapter M Solutions
Intermediate Accounting: Reporting And Analysis
Ch. M - Explain interest.Ch. M - Prob. 2GICh. M - Prob. 3GICh. M - Prob. 4GICh. M - Prob. 5GICh. M - Prob. 6GICh. M - Prob. 7GICh. M - Prob. 8GICh. M - Prob. 9GICh. M - Prob. 10GI
Ch. M - Prob. 11GICh. M - Prob. 12GICh. M - Prob. 13GICh. M - Prob. 14GICh. M - Prob. 15GICh. M - Prob. 16GICh. M - Prob. 17GICh. M - Prob. 18GICh. M - Prob. 19GICh. M - Prob. 20GICh. M - Prob. 21GICh. M - Prob. 22GICh. M - What is a deferred ordinary annuity? How does it...Ch. M - Prob. 24GICh. M - Prob. 25GICh. M - Give two examples of assets and three examples of...Ch. M - Prob. 1MCCh. M - Prob. 2MCCh. M - Refer to the present value table information on...Ch. M - Refer to the present value table information on...Ch. M - On May 1, 2019, a company purchased a new machine...Ch. M - An office equipment representative has a machine...Ch. M - Prob. 7MCCh. M - For which of the following transactions would the...Ch. M - On July 1, 2019, James Rago signed an agreement to...Ch. M - On January 1, 2019, Ken Company sold a machine to...Ch. M - Prob. 1RECh. M - Based on the following annual interest rates, what...Ch. M - Prob. 3RECh. M - Prob. 4RECh. M - Next Level Potter wishes to deposit a sum that at...Ch. M - Prob. 6RECh. M - Prob. 7RECh. M - Prob. 8RECh. M - Prob. 9RECh. M - If 90,000 is invested in a fund on December 31,...Ch. M - Samuel Ames owes 20,000 to a friend. He wants to...Ch. M - Prob. 12RECh. M - Prob. 13RECh. M - Prob. 14RECh. M - Prob. 1ECh. M - Future Value Hugh Colson deposited 20,000 in a...Ch. M - Prob. 3ECh. M - Future Value of Annuity Using appropriate tables,...Ch. M - Prob. 5ECh. M - Prob. 6ECh. M - Prob. 7ECh. M - Cash Flow Amounts R. Lee Rouse borrows 10,000 that...Ch. M - Prob. 9ECh. M - Amount of an Annuity John Goodheart wishes to...Ch. M - Prob. 11ECh. M - Prob. 12ECh. M - Present Value of Leased Asset On January 1, 2019,...Ch. M - Amount of an Annuity Beginning December 31, 2023,...Ch. M - Prob. 1PCh. M - Prob. 2PCh. M - Prob. 3PCh. M - Determining Loan Repayments Jerry Rockness needs...Ch. M - Prob. 5PCh. M - Prob. 6PCh. M - Value of an Annuity Using the appropriate tables,...Ch. M - Serial Installments; Amounts Applicable to...Ch. M - Prob. 9PCh. M - Comprehensive Part a. Reproduced in the following...Ch. M - Prob. 11PCh. M - Present Value of an Annuity John Joshua wants to...Ch. M - Present Value of an Annuity Ralph Benke wants to...Ch. M - Compound Interest Issues You are given the...Ch. M - Cash Flow Amounts On January 1, 2019, Philip...Ch. M - Prob. 16PCh. M - Comprehensive The following are three independent...Ch. M - Prob. 18PCh. M - Asset Purchase Price BWP Inc. is considering the...Ch. M - Prob. 1CCh. M - Prob. 2CCh. M - Prob. 3CCh. M - Prob. 4CCh. M - Prob. 5C
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- Net present value methodannuity Jones Excavation Company is planning an investment of 125,000 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged 90 per hour for bulldozer work. The bulldozer operator costs 30 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing 7,500. The bulldozer uses fuel that is expected to cost 15 per hour of bulldozer operation. a. Determine the equal annual net cash flows from operating the bulldozer. b. Determine the net present value of the investment, assuming that the desired rate of return is 10%. Use the present value of an annuity table appearing in Exhibit 5 of this chapter. Round to the nearest dollar. c. Should Jones invest in the bulldozer, based on this analysis? Explain. d. Determine the number of operating hours such that the present value of cash flows equals the amount to be invested. Round all calculations to whole numbers.arrow_forwardPlease see image for question to solve for. Options for question B are; YesNoarrow_forwardA highway department must select one of two pavement repair options for a 10-mile section of a four-lane highway. The analysis period is 8 years, and the interest rate is 8%. Option 1 Option2 Initial cost $5,300,000 $3,000,000 Annual cost 300,000 400,000 Lifetime 8 years 4 years a) Form the cash flow table for the alternatives and the incremental investment, using standard sign convention. b) Using present worth analysis, find the best repair option. c) Using annual cash flow analysis, find the best repair option. d) Using the incremental rate of return analysis, find the best repair option. e) Using incremental benefit-cost ratio analysis, find the best repair optionarrow_forward
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