1460T_c06.qxd1/10/0602:26 am Page295 EQA Problems·295 (c)Jane Pauley has $20,000 to invest today at 9%to pay a debt of $56,253.How many years will it take her to accumulate enough to liquidate the debt? (d)Maria Shriver has a $27,600 debt that she wishes to repay 4 years from today;she has $18,181 that she intends to invest for the 4 years.What rate of interest will she need to earn annually in order to accumulate enough to pay the debt? (L05, P6-3 (Analysis of Alternatives)Assume that Wal-Mart,Inc.has decided to surface and maintain for 6,7) 10 years a vacant lot next to one of its discount-retail outlets to serve as a parking lot for customers.Man- agement is considering the following bids involving two different qualities of surfacing for a parking area of 12,000 square yards. Bid A:A surface that costs $5.25 per square yard to install.This surface will have to be replaced at the end of 5 years.The annual maintenance cost on this surface is estimated at 20 cents per square yard for each year except the last year of its service.The replacement surface will be similar to the initial surface. Bid B:A surface that costs $9.50 per square yard to install.This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year,at an estimated cost of 9 cents per square yard. Instructions Prepare computations showing which bid should be accepted by Wal-Mart,Inc.You may assume that the cost of capital is 9%,that the annual maintenance expenditures are incurred at the end of each year,and that prices are not expected to change during the next 10 years. (L06, P6-4 (Evaluating Payment Alternatives)Terry O'Malley has just learned he has won a $900,000 prize 7) in the lottery.The lottery has given him two options for receiving the payments:(1)If Terry takes all the money today,the state and federal governments will deduct taxes at a rate of 46%immediately. (2)Alternatively,the lottery offers Terry a payout of 20 equal payments of $62,000 with the first payment occurring when Terry turns in the winning ticket.Terry will be taxed on each of these payments at a rate of25%. Instructions Assuming Terry can earn an 8%rate of return(compounded annually)on any money invested during this period,which pay-out option should he choose? (L05, P6-5 (Analysis of Alternatives)Sally Brown died,leaving to her husband Linus an insurance policy 6,7) contract that provides that the beneficiary (Linus)can choose any one of the following four options. (a)$55,000 immediate cash. (b)$3,700 every 3 months payable at the end of each quarter for 5 years. (c) $18,000 immediate cash and $1,600 every 3 months for 10 years,payable at the beginning of each 3-month period. (d)$4,000 every 3 months for 3 years and $1,200 each quarter for the following 25 quarters,all pay- ments payable at the end of each quarter. Instructions If money is worth 2%%per quarter,compounded quarterly,which option would you recommend that Linus exercise? (L0 8)P6-6 (Purchase Price of a Business)During the past year,Nicole Bobek planted a new vineyard on 150 acres of land that she leases for $27,000 a year.She has asked you as her accountant to assist her in determining the value of her vineyard operation The vineyard will bear no grapes for the first 5 years (1-5).In the next 5 years (6-10),Nicole estimates that the vines will bear grapes that can be sold for $60,000 each year.For the next 20 years(11-30)she ex- pects the harvest will provide annual revenues of $100,000.But during the last 10 years (31-40)of the vineyard's life,she estimates that revenues will decline to $80,000 per year. During the first 5 years the annual cost of pruning,fertilizing,and caring for the vineyard is estimated at $9,000;during the years of production,6-40,these costs will rise to $10,000 per year.The relevant mar- ket rate of interest for the entire period is 12%.Assume that all receipts and payments are made at the end of each year. Instructions Dick Button has offered to buy Nicole's vineyard business by assuming the 40-year lease.On the basis of the current value of the business,what is the minimum price Nicole should accept? (L0 5,P6-7 (Time Value Concepts Applied to Solve Business Problems)Answer the following questions 6,7)related to Derek Lee Inc.(c) Jane Pauley has $20,000 to invest today at 9% to pay a debt of $56,253. How many years will it take her to accumulate enough to liquidate the debt? (d) Maria Shriver has a $27,600 debt that she wishes to repay 4 years from today; she has $18,181 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt? P6-3 (Analysis of Alternatives) Assume that Wal-Mart, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its discount-retail outlets to serve as a parking lot for customers. Man￾agement is considering the following bids involving two different qualities of surfacing for a parking area of 12,000 square yards. Bid A: A surface that costs $5.25 per square yard to install. This surface will have to be replaced at the end of 5 years. The annual maintenance cost on this surface is estimated at 20 cents per square yard for each year except the last year of its service. The replacement surface will be similar to the initial surface. Bid B: A surface that costs $9.50 per square yard to install. This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year, at an estimated cost of 9 cents per square yard. Instructions Prepare computations showing which bid should be accepted by Wal-Mart, Inc. You may assume that the cost of capital is 9%, that the annual maintenance expenditures are incurred at the end of each year, and that prices are not expected to change during the next 10 years. P6-4 (Evaluating Payment Alternatives) Terry O’Malley has just learned he has won a $900,000 prize in the lottery. The lottery has given him two options for receiving the payments: (1) If Terry takes all the money today, the state and federal governments will deduct taxes at a rate of 46% immediately. (2) Alternatively, the lottery offers Terry a payout of 20 equal payments of $62,000 with the first payment occurring when Terry turns in the winning ticket. Terry will be taxed on each of these payments at a rate of 25%. Instructions Assuming Terry can earn an 8% rate of return (compounded annually) on any money invested during this period, which pay-out option should he choose? P6-5 (Analysis of Alternatives) Sally Brown died, leaving to her husband Linus an insurance policy contract that provides that the beneficiary (Linus) can choose any one of the following four options. (a) $55,000 immediate cash. (b) $3,700 every 3 months payable at the end of each quarter for 5 years. (c) $18,000 immediate cash and $1,600 every 3 months for 10 years, payable at the beginning of each 3-month period. (d) $4,000 every 3 months for 3 years and $1,200 each quarter for the following 25 quarters, all pay￾ments payable at the end of each quarter. Instructions If money is worth 21 ⁄2% per quarter, compounded quarterly, which option would you recommend that Linus exercise? P6-6 (Purchase Price of a Business) During the past year, Nicole Bobek planted a new vineyard on 150 acres of land that she leases for $27,000 a year. She has asked you as her accountant to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Nicole estimates that the vines will bear grapes that can be sold for $60,000 each year. For the next 20 years (11–30) she ex￾pects the harvest will provide annual revenues of $100,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $80,000 per year. During the first 5 years the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6–40, these costs will rise to $10,000 per year. The relevant mar￾ket rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year. Instructions Dick Button has offered to buy Nicole’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Nicole should accept? P6-7 (Time Value Concepts Applied to Solve Business Problems) Answer the following questions related to Derek Lee Inc. Problems • 295 (L0 5, 6, 7) (L0 6, 7) (L0 5, 6, 7) (L0 8) (L0 5, 6, 7) 1460T_c06.qxd 1/10/06 02:26 am Page 295