The Campus in Beaverton, Oregon is home to Nike’s World Headquarters. In addition to a number of architecturally beautiful office buildings, such as Steve Prefontaine Hall, Tiger Woods Center, and the Michael Jordan Building, the campus also has an employeewellness center named after the famous Bo Jackson. The center and accompanying field are used for employee fitness classes, product testing, and sponsored athlete workouts. Due to a savings of nearly $150,000 per year on field maintenance by replacing the natural grass that accompanies the Bo Jackson wellness center with artificial field turf, the Nike managerial teamis proposing to replace the current natural grass field with a field turf surface. Although the Nike managerial team is convinced that field turf is the correct choice to make, they are unsure of how to finance the required initial start-up costs of $1,000,000. As a result, they have contacted you to receive guidance on this important and potentially difficult financing problem. The situation is as follows:
The Nike managerial team has access to three sources of financing:
General funds from previous year’s profits (retained earnings), maximum allowance = $200,000.
Approval to issue a bond package, no more than $550,000 maximum.
Approval to take out a maximum of $450,000 in direct loans from a local bank.
(1) Determine the amounts of retained earnings, bonds, and direct loans to take out
Retained Earnings:
Maximum Amount - $200,000
Interest Rate - 0.00
Payment Amount - 0.00
Opportunity Costs - Substantial
- Use of retained earnings are awarded based on competitive grounds. Request must persuade a funding committee of need, usefulness, and appropriateness of project.