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# Rent and Interest Calculations for a Corporation

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1. You can choose between the following rent payments:
(a) A lump sum cash payment of \$100,000

(b) 10 annual payments of \$12,000 each, the first occurring immediately.

(c) 120 monthly payments of \$1,200 each. the first occurring immediately. (Friendly suggestion: this is a lot easier to calculate on a computer spreadsheet.)

(d) Which rental payment scheme would you choose if the interest rate was an effective 5% per year?

(e) Spreadsheet question: At what interest rate would you be indifferent between the first and the second choice above? (Hint: Graph the NPV of the second project as a function of the interest rate.)

2. A project costs \$19,000 and promises the followig cash flows: Year 1 \$12,500 Year 2 \$6,000 and year 3 \$3,000.
The appropriate discount rate is %15 per annum. Should you invest in this project?

3. Which of the following are good candidates for ascertaining the value effects with an event study, and why?

(a) An acquirer wants to buy the firm.
(b) The CEO dies.
(c) The CEO ages.
(d) Positive earnings surprise at the annual meetings.
(e) Purchase of a new machine.
(f) A law is passed to force the company to reduce its emissions.

Please answer the 3 questions completely and clearly so I can understand the process,(step by step).

#### Solution Summary

The expert examines rent and interest calculations for a corporation. The payment which is the most effective is given.

\$2.19

## Calculate the Correct Net Income for Frazz Corporation

The response to these questions is being evaluated on the basis of: understanding of concepts, computational correctness, thoughtfulness, and clarity. All necessary calculations must be clearly shown. Your response can be in either Word or Excel.

1. Frazz Corporation is a privately-held manufacturer of industrial equipment. For calendar year 2009, Frazz reported a net income before taxes of \$684,300. However, because of turnover in the accounting department, some errors were made. Given the following information, compute the correct net income before taxes for Frazz. Explain your answer.

-On March 31, 2009, Frazz paid \$48,000 rent in advance for a storage facility. The entire payment was debited to Rent Expense. The payment was for the period April 1, 2009 to March 31, 2010.

-On January 2, 2009, Frazz put in service new office furniture with a cost of \$26,000, and estimated salvage value of \$5,000. Estimated useful life of the furniture is 14 years, but the depreciation calculation (straight-line method) erroneously used 7 years.

-On December 30, 2009, Frazz shipped a custom-order machine to a customer, recording sales revenue of \$132,500, and COGS of \$98,700. The contract required installation and calibration by Frazz, which was completed January 20, 2010.

-Early in the year, Frazz began offering for sale a pre-paid three-year technical support plan for its equipment. Payments of \$60,000 were received for plan coverage during the year, and recorded as Fee Revenue. It is estimated that 14% of this amount was earned in 2009, with the rest relating to 2010 and 2011.

-During 2009, Frazz had outstanding an average of \$1,170,000 in bank loans, at an average rate of 6%. Interest payments relating to 2009 were made in the amount of \$37,300 and recorded as Interest Expense, but no other entries were made.

-At the beginning of 2009, Allowance for Bad Debts was \$37,800. Uncollectible accounts of \$32,000 were written off during the year, and charged to Bad Debt Expense. No other entries were made. It is estimated that the ending balance of the allowance should be \$40,400.

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