Question I Blackwell Hotels Inc.
On January 1, 2011, Blackwell Hotels Incorporated (BHI) acquired a building costing $20,000,000 to use in its operations. The building has an expected useful life of 25 years, with an estimated salvage value of $5,000,000. To pay for the building, Blackwell borrowed $20,000,000 from Barney State Bank (BSB). The bank loan will be repaid over 20 years.
REQUIRED: (Round answers to the nearest thousand dollars.)
1. For this part only, assume that the loan interest rate is 8 percent, compounded annually. Assume that the loan will be repaid with equal payments at the end of each year. Calculate the annual payment that BHI will pay for the loan.
For parts 2 through 5, assume that the loan interest rate is 6 percent, compounded annually, and that the annual loan payment is $1,743,691 to be paid at the end of each year.
2. Calculate interest expense arising from the loan for the year ended December 31, 2011.
3. Calculate the book value of the loan on January 1, 2012.
4. Assume that BHI paid the loan each year as provided in the loan agreement. Calculate the total amount of interest expense recognized by BHI over the 20 year period from January 1, 2011 through December 31, 2030.
5. Assume that on January 1, 2016, BSB offered BHI the opportunity to repay the outstanding amount of the loan in exchange for a payment of $16,000,000. Calculate the gain or loss that BHI would recognize on the early repayment of the loan. (The loan has been outstanding for 5 years on this date.)
For parts 6 and 7, assume that the loan interest rate is 6 percent annually with semiannual compounding, that loan payments are to be made on June 30 and December 31 of each year, and that the semi-annual payment amount is $865,247.
6. Calculate interest expense arising from the loan for the year ended December 31, 2011.
7. Calculate the book value of the loan on January 1, 2012.
8. Assume that BHI depreciates the building using the straight-line method. Calculate the depreciation expense for the building for 2011.