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Time Value of Money

1. Clarence Weatherspoon, a super salesman contemplating retirement on his 55 birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30th, beginning in 2014 and continuing through 2017.
To Develop this fund, Clarence intends to make equal contributions on June 30th of each of the years 2010-2013.
a. How much must the balance of the fund equal on June 30, 2013, in order for Clarence Weatherspoon to satisfy his objective.

b. What are each of Clarence's contributions to the fund?

2. Lance Armstrong Inc. manufactures cycling equipment. Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's bikes.

After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2007, due on March 1, 2022, with the interest payable each March 1 and September 1.

At the time of issuance, the market interest rate for similar financial instruments is 10%.

a. as the controller of the company determine the selling price of the bonds.

3. Andrew Bogut just received a signing bonus of $1,000,000. His plan is to invest this payment in a fund that will earn 8%, compounded annually.

a. If Bogut plans to establish the AB Foundation once the fund grows to $1,999,000, how many years until he can establish the foundation?

b. Instead of investing the entire $1,000,000, Bogut invests $300,000 today and plans to make 9 equal annual investments into the fund beginning one year from today. What amount should the payments be if Bogut plans ot establish the $1,999,000 foundation at the end of 9 years?

4. Assume that Sonic Foundry Corporation has contractual debt outstanding. Sonic has available two means of settlement: it can either make immediate payment of $2,600,000, or it can make $300,000 payments beginning now and be made on the first day of each of the 15 years.

a. What payment method would you recommend?

Solution Preview

Please find my response attached.

The best way to solve these questions is to use Excel, but you can also use a financial calculator if you want. ...

Solution Summary

Overall, an excellent response with a great amount of detail. The solution is very easy to understand and very well explained.