Question

A: Skysong Company recently signed a lease for a new office building, for a lease period of 11 years. Under the lease agreement, a security deposit of $12,100 is made, with the deposit to be returned at the expiration of the lease, with interest compounded at 5% per year.

B: Concord Corporation, having recently issued a $20,009,700, 15-year bond issue, is committed to make annual sinking fund deposits of $608,900. The deposits are made on the last day of each year and yield a return of 10%.

C: Concord Corporation, having recently issued a $20,009,700, 15-year bond issue, is committed to make annual sinking fund deposits of $608,900. The deposits are made on the last day of each year and yield a return of 10%.

D: Under the terms of his salary agreement, president Chris Walters has an option of receiving either an immediate bonus of $55,000, or a deferred bonus of $70,000 payable in 10 years.

Answer 1

Note: Questions B & C posted are same

Answers

A What amount will the company receive at the time the lease expires?

Future value of $12,100 @ 5% for 11 years
($12,100 x 1.71034)	=	$20,695

B & C Will the fund at the end of 15 years be sufficient to retire the bonds?

No, The fund will not be sufficient.

Future value of an ordinary annuity of $608,900 at 10% for 15 years ($608,900 x 31.77248)

=

$19,346,263

D Ignoring tax considerations, and assuming a relevant interest rate of 8%, which form of settlement should Walters accept?

$70,000 discounted at 8% for 10 years:
$70,000 x 0.46319	=	$32,423

Accept the bonus of $55,000 now.
(Also, consider whether the 8% is an appropriate discount rate if the president can earn compound interest at a higher rate without too much additional risk.)