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d. Nancy Holmes deposited
$5,800 in the bank on January 1 a few years ago. The bank pays
an interest rate of 10% compounded annually, and the deposit
is now worth $15,026. How many years
has the deposit been invested? |
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Problem 9-12
Comparison of Alternatives
Jeanne's uncle has decided to give her money as a college graduation
gift. He has given Jeanne three options on how she may receive
the gift.
a. Receive $900 immediately. Assume that interest is compounded
semiannually.
b. Receive $400 at the end of each year for three years. Assume
that interest is compounded annually.
c. Receive $197 at the end of each six-month period for three
years. Assume that interest is compounded semiannually.
Using future value calculations, decide which option allows
Jeanne to receive the maximum gift. Assume that an annual interest
rate of 10% can be earned on the money received.
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Problem 9-4a Comparison of
Simple and Compound Interest
On June 30, 1995, Rolls, Inc., borrowed $25,000 from its bank,
signing a 6% note. Principal and interest are due at the end
of two years.
1. Assuming that the note earns simple interest for the bank,
calculate the amount of interest accrued on each of the following
dates:
December 31, 1995
December 31, 1996
June 30, 1997
2. Assume instead that the note earns 6% for the bank but is
compounded semiannually. Calculate the amount of interest accrued
on the same dates as those in part 1.
3. What amount of additional interest expense is recognized in
part 2 over part 1?
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Problem 9-11a
Four Situations
The following situations involve the application of the time
value of money concept.
a. Jan Cain deposited $19,500 in the
bank on January 1, 1978, at an interest rate of 11% compounded
annually. How much has been accumulated in the acount by January1,
1995? 
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You are concerned about the loan provision that requires a
2:1 ratio of current assets to current liabilities.
1. Indicate what actions could be taken during the next two months
to meet the loan provision. Which of the available actions should
be recommended?
2. What is the meaning of the term window-dressing financial
statements? What are the long-run implications of actions taken
to window-dress financial statements? |
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Finally, Mr. Seaver reminded John that most of the employees
of ABC, including Mr. Seaver, were members of the company's profit-sharing
plan and would not be happy with the reduced share of profits.
Mr. Seaver thanked John for his judgment concerning warranty
cost but told him that the accrual for the current year would
remain at 5%.
John left the meeting with Mr. Seaver somewhat frustrated. He
was convinced that his judgment concerning the warranty costs
was correct. He knew that the owner of ABC would be visiting
the office next week and wondered whether he should discuss the
matter with him personally at that time. John also had met one
of the loan officers from the bank several times and considered
calling her to discuss his concern about the warranty expense
amount on the year-end statements.
Discuss the courses of action available to John. What should
John do concerning his judgment of warranty costs?
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