Question

Your answer is partially correct. Pronghorn Corporation, having recently issued a $20,134, 100, 15-year bond issue, is committed to make annual sinking fund deposits of $613,500. The deposits are made on the last day of each year and yield a return of 10%. Click here to view factor tables Will the fund at the end of 15 years be sufficient to retire the bonds? Future value of an ordinary annuity $ Will funds be sufficient? e Textbook and Media Your answer is incorrect. Pronghorn Corporation, having recently issued a $20,134,100, 15-year bond issue, is committed to make annual sinking fund deposits of $613,500. The deposits are made on the last day of each year and yield a return of 10%. Click here to view factor tables Determine the amount of deficiency. (Round factor values to 5 decimal places, eg. 1.25124 and final answer to decimal places, eg. 458,581.) Deficiency $ e Textbook and Media . Your answer is partially correct. Under the terms of his salary agreement, president Steve Walters has an option of receiving either an immediate bonus of $66,000, or a deferred bonus of $84,000 payable in 10 years. Click here to view factor tables Ignoring tax considerations and assuming a relevant interest rate of 4%, which form of settlement should Walters accept? Present value of deferred bonus $ Accept Bonus Now e Textbook and Media

Answer 1

1. Here, the deposits will be same every year, so it is an annuity. Here we will use the future value of annuity of $1 table.

From the table of future value of annuity, the value of $1 annuity for 15 periods at 10% interest rate is 31.772.

Now, the future of $613500 annuity is :

Future value of annuity = $613500 * 31.772 = $19492122

Given value of bonds = $20134100

Since the future value of annuity or future value of deposits is less than the value of bonds, so the funds are not sufficient.

2. Amount of deficiency = Bond value - Future value of deposits

We will put the values calculate in point (1) above to this formula,

Amount of deficiency = $20134100 - $19492122 = $641978

3. We will find out the present value of deferred bonus. We will use the present value of $1 table to find the required present value.

From the table, Present value of $1 at 4% for 10 years = 0.6756

Present value of deferred bonus = $84000 * 0.6756 = $56750.4

If Walters accept bonus now, then its value is $66000.

if Walters accept deferred bonus, then its value is $56750.4

Since the value of accepting bonus now is higher then the present value of deferred bonus, so Walters should accept the bonus now.