Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor.The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years.
In addition, Engineering has estimated that required year-end maintenance costs will be $1,060 per year for the first 5 years, $1,860 per year for the next 10 years, and $2,770 per year for the last 5 years.
Following is each vendor’s sale package. Vendor A: $56,240 cash at time of delivery and 10 year-end payments of $18,600 each.
Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,010.
Vendor B: Forty semiannual payments of $9,320 each, with the first installment due upon delivery. Vendor B will perform all year end maintenance for the next 20 years at no extra charge.
Vendor C: Full cash price of $144,530 will be due upon delivery. Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, from which vendor should the press be purchased?
2. Answer the following questions related to Dubois Inc.
(a) Dubois Inc. has $604,600 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $88,844 at the end of each year for 11 years, and the other is to receive a single lump sum-payment of $1,724,996 at the end of the 11 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment.
(b) Dubois Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $831,200. The purchase agreement specifies an immediate down payment of $231,600 and semiannual payments of $73,925 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction? Interest rate %
(c) Dubois Inc. loans money to John Kruk Corporation in the amount of $820,000. Dubois accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Dubois needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Dubois will receive on the sale of the note? (Round answers to 0 decimal places, e.g. $458,581.) Amount received on sale of note $
(d) Dubois Inc. wishes to accumulate $1,362,000 by December 31, 2022, to retire bonds outstanding. The company deposits $231,600 on December 31, 2012, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,362,000 is available at the end of 2022. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.) (Round answers to 0 decimal places, e.g. $458,581.)
(a) Mark Yoders wishes to become a millionaire. His money market fund has a balance of $403,884 and has a guaranteed interest rate of 12%. How many years must Mark leave that balance in the fund in order to get his desired $1,000,000?
(b) Assume that Elvira Lehman desires to accumulate $1 million in 15 years using her money market fund balance of $209,004. At what interest rate must Elvira’s investment compound annually? (Round answer to 0 decimal places, e.g. 5%.)
(c) Your client, Wyeth Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 28 years. Wyeth has an investment cost of $462,298 in the machine, which has a useful life of 28 years and no salvage value at the end of that time. Your client is interested in earning an 12% return on its investment and has agreed to accept 28 equal rental payments at the end of each of the next 28 years.
You are requested to provide Wyeth with the amount of each of the 28 rental payments that will yield an 12% return on investment. (Round answers to 0 decimal places, e.g. $458,581.)
(a) What is the amount of the payments that Ned Winslow must make at the end of each of 9 years to accumulate a fund of $92,580 by the end of the 9th year, if the fund earns 9% interest, compounded annually? (Round answers to 0 decimal places, e.g. $458,581.)
(b) Robert Hitchcock is 42 years old today and he wishes to accumulate $576,500 by his 64th birthday so he can retire to his summer place on Lake Hopatcong. He wishes to accumulate this amount by making equal deposits on his 42nd through his 63rd birthdays. What annual deposit must Robert make if the fund will earn 10% interest compounded annually? (Round answers to 0 decimal places, e.g. $458,581.)
(c) XXXXX XXXXX has $22,600 to invest today at 10% to pay a debt of $53,290. How many years will it take her to accumulate enough to liquidate the debt?
(d) Cindy Houston has a $41,200 debt that she wishes to repay 4 years from today; she has $28,140 that she intends to invest for the 4 years. What rate of interest will she need to earn annually in order to accumulate enough to pay the debt?