Question

# Itzak Perlman Corporation needs \$15,000,000 in ten years to be able to retire bonds that will...

Itzak Perlman Corporation needs \$15,000,000 in ten years to be able to retire bonds that will be maturing at that time. What amount must Perlman deposit into a bond sinking fund at the end of each year if the fund is expected to earn interest at a rate of 8% per year?

2. Igor Stravinsky is retiring today. His employer has given the option of taking a lump sum payout of his pension or receiving quarterly annuity payments for the next seven years. He could receive \$950,000 today or receive \$45,000 every three months for seven years, with the first payment received today. If money is worth 2% per quarter, compounded quarterly, which option would you recommend to Stravinsky?

3. Tchaikovsky Company purchased a custom-made grand piano on December 31, 2002. The purchase agreement stipulated that Tchaikovsky should pay \$25,000 at the time of the purchase and \$5,000 every six months for the next four years. The first of eight \$5,000 payments would occur six months from today. Assuming an appropriate interest rate of 4% per year, what is the cost of the piano?

Solution to QUESTION-1

The amount to be deposited by Perlman into the bond sinking fund at the end of each year

Here, we have Future Value = \$15,000,000

Annual interest rate (r) = 8.00% per year

Number of periods (n) = 10 Years

Annual deposit payment (P) = ?

Therefore, Future Value of an Ordinary Annuity = P x [{(1+ r)n - 1} / r ]

\$15,000,00 = P x [{(1 + 0.08)10 - 1} / 0.08]

\$15,000,00 = P x [(2.158924997 – 1) / 0.08]

\$15,000,00 = P x [1.158924997 / 0.08]

\$15,000,00 = P x 14.48656247

P = \$15,000,000 / 14.48656247

P = \$1,035,442.33

“Hence, the amount to be deposited by Perlman into the bond sinking fund at the end of each year will be \$1,035,442.33”

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