The terms of the arrangement require the operator to: Construct a road-completing construction within 2 years Maintain and operate the road for 3 years Resurface the road at the end of Year 4 The government pays the operator P200 per year in Years 3 to 5 for making the road available to the public The road is turnover to the government at the end of Year 5 The operators determine that the implied interest rate is 24.42%

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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The terms of the arrangement require the operator to:
Construct a road-completing construction within 2 years
Maintain and operate the road for 3 years
Resurface the road at the end of Year 4
The government pays the operator P200 per year in Years 3 to 5 for
making the road available to the public
The road is turnover to the government at the end of Year 5
The operators determine that the implied interest rate is 24.42%
The operator finances the arrangement entirely with debt. The debt
proceeds are taken as the contract cost are paid. The debt is payable
as follows: P75 in each Years of 3 and 4 and P40 in Year 5. The
effective interest rate is 25.77%
The operator makes the following estimates:
YEAR CONSTRUCTION
COST
STAND-ALONE
SELLING PRICE
Forecast cost +10%
Construction Services
1
70
80
Forecast cost +20%
Operation Services
Road Resurfacing
Compute for the profit for Year 2.
3-5
4
25
Forecast cost +30%
15
Forecast cost +10%
(With two decimal places for the final answer)
Transcribed Image Text:The terms of the arrangement require the operator to: Construct a road-completing construction within 2 years Maintain and operate the road for 3 years Resurface the road at the end of Year 4 The government pays the operator P200 per year in Years 3 to 5 for making the road available to the public The road is turnover to the government at the end of Year 5 The operators determine that the implied interest rate is 24.42% The operator finances the arrangement entirely with debt. The debt proceeds are taken as the contract cost are paid. The debt is payable as follows: P75 in each Years of 3 and 4 and P40 in Year 5. The effective interest rate is 25.77% The operator makes the following estimates: YEAR CONSTRUCTION COST STAND-ALONE SELLING PRICE Forecast cost +10% Construction Services 1 70 80 Forecast cost +20% Operation Services Road Resurfacing Compute for the profit for Year 2. 3-5 4 25 Forecast cost +30% 15 Forecast cost +10% (With two decimal places for the final answer)
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