1460T_c06.qxd12/2/0509:28 am Page297 EQA Problems·297 (c)The company has always followed the policy to take any cash discounts on goods purchased.Re- cently the company purchased a large amount of raw materials at a price of $800,000 with terms 2/10,n/30 on which it took the discount.Starship has recently estimated its cost of funds at 10% Should Starship continue this policy of always taking the cash discount? (L0 5,P6-10 (Analysis of Lease vs.Purchase)Jose Rijo Inc.owns and operates a number of hardware stores 6,7)in the New England region.Recently the company has decided to locate another store in a rapidly grow- ing area of Maryland.The company is trying to decide whether to purchase or lease the building and related facilities. Purchase:The company can purchase the site,construct the building,and purchase all store fixtures. The cost would be $1,650,000.An immediate down payment of $400,000 is required,and the remaining $1,250,000 would be paid off over 5 years at $300,000 per year(including interest).The property is expected to have a useful life of 12 years,and then it will be sold for $500,000.As the owner of the property,the company will have the following out-of-pocket expenses each period. Property taxes (to be paid at the end of each year) $40,000 Insurance(to be paid at the beginning of each year) 27.000 Other(primarily maintenance which occurs at the end of each year) 16,000 S83,000 Lease:First National Bank has agreed to purchase the site,construct the building,and install the appropriate fixtures for Rijo Inc.if Rijo will lease the completed facility for 12 years.The annual costs for the lease would be $240,000.Rijo would have no responsibility related to the facility over the 12 years. The terms of the lease are that Rijo would be required to make 12 annual payments(the first payment to be made at the time the store opens and then each following year).In addition,a deposit of $100,000 is required when the store is opened.This deposit will be returned at the end of the twelfth year,assuming no unusual damage to the building structure or fixtures. Currently the cost of funds for Rijo Inc.is 10%. Instructions Which of the two approaches should Rijo Inc.follow? (L0 8)P6-11 (Pension Funding)You have been hired as a benefit consultant by Maugarite Alomar,the owner of Attic Angels.She wants to establish a retirement plan for herself and her three employees.Maugarite has provided the following information:The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50%of Maugarite's last-year annual salary and 40%of the last-year annual salary for each employee.The plan will make annual payments at the beginning of each year for 20 years from the date of retirement.Maugarite wishes to fund the plan by making 15 annual deposits beginning January 1,2007.Invested funds will earn 12%compounded annually.Information about plan participants as of January 1,2007,is as follows. Maugarite Alomar,owner:Current annual salary of $40,000;estimated retirement date January 1, 2032. Kenny Rogers,flower arranger:Current annual salary of $30,000;estimated retirement date January 1, 2037. Anita Baker,sales clerk:Current annual salary of $15,000;estimated retirement date January 1,2027. Willie Nelson,part-time bookkeeper:Current annual salary of $15,000;estimated retirement date January 1,2022. In the past,Maugarite has given herself and each employee a year-end salary increase of 4%.Maugarite plans to continue this policy in the future. Instructions (a)Based upon the above information,what will be the annual retirement benefit for each plan par- ticipant?(Round to the nearest dollar.)(Hint:Maugarite will receive raises for 24 years.) (b)What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.) (c)What is the amount of each annual deposit Maugarite must make to the retirement plan? (L0 8)P6-12 (Pension Funding)James Qualls,newly appointed controller of KBS,is considering ways to reduce his company's expenditures on annual pension costs.One way to do this is to switch KBS's pen- sion fund assets from First Security to NET Life.KBS is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history.Despite financial problems,KBS still is committed to providing its employees with good pension and postretirement health benefits.(c) The company has always followed the policy to take any cash discounts on goods purchased. Re￾cently the company purchased a large amount of raw materials at a price of $800,000 with terms 2/10, n/30 on which it took the discount. Starship has recently estimated its cost of funds at 10%. Should Starship continue this policy of always taking the cash discount? P6-10 (Analysis of Lease vs. Purchase) Jose Rijo Inc. owns and operates a number of hardware stores in the New England region. Recently the company has decided to locate another store in a rapidly grow￾ing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities. Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,650,000. An immediate down payment of $400,000 is required, and the remaining $1,250,000 would be paid off over 5 years at $300,000 per year (including interest). The property is expected to have a useful life of 12 years, and then it will be sold for $500,000. As the owner of the property, the company will have the following out-of-pocket expenses each period. Property taxes (to be paid at the end of each year) $40,000 Insurance (to be paid at the beginning of each year) 27,000 Other (primarily maintenance which occurs at the end of each year) 16,000 $83,000 Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Rijo Inc. if Rijo will lease the completed facility for 12 years. The annual costs for the lease would be $240,000. Rijo would have no responsibility related to the facility over the 12 years. The terms of the lease are that Rijo would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $100,000 is required when the store is opened. This deposit will be returned at the end of the twelfth year, assuming no unusual damage to the building structure or fixtures. Currently the cost of funds for Rijo Inc. is 10%. Instructions Which of the two approaches should Rijo Inc. follow? P6-11 (Pension Funding) You have been hired as a benefit consultant by Maugarite Alomar, the owner of Attic Angels. She wants to establish a retirement plan for herself and her three employees. Maugarite has provided the following information: The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50% of Maugarite’s last-year annual salary and 40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of retirement. Maugarite wishes to fund the plan by making 15 annual deposits beginning January 1, 2007. Invested funds will earn 12% compounded annually. Information about plan participants as of January 1, 2007, is as follows. Maugarite Alomar, owner: Current annual salary of $40,000; estimated retirement date January 1, 2032. Kenny Rogers, flower arranger: Current annual salary of $30,000; estimated retirement date January 1, 2037. Anita Baker, sales clerk: Current annual salary of $15,000; estimated retirement date January 1, 2027. Willie Nelson, part-time bookkeeper: Current annual salary of $15,000; estimated retirement date January 1, 2022. In the past, Maugarite has given herself and each employee a year-end salary increase of 4%. Maugarite plans to continue this policy in the future. Instructions (a) Based upon the above information, what will be the annual retirement benefit for each plan par￾ticipant? (Round to the nearest dollar.) (Hint: Maugarite will receive raises for 24 years.) (b) What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.) (c) What is the amount of each annual deposit Maugarite must make to the retirement plan? P6-12 (Pension Funding) James Qualls, newly appointed controller of KBS, is considering ways to reduce his company’s expenditures on annual pension costs. One way to do this is to switch KBS’s pen￾sion fund assets from First Security to NET Life. KBS is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial problems, KBS still is committed to providing its employees with good pension and postretirement health benefits. Problems • 297 (L0 5, 6, 7) (L0 8) (L0 8) 1460T_c06.qxd 12/2/05 09:28 am Page 297