Question

The 501st is exploring the possibility of purchasing a van to transport their Stormtroopers and other members to gigs outside of the Memphis area to such events as Weird Al concerts. The agreed cost of the van that they have decided to purchase is $45,000 which includes a rear lift to get Brodie and his equipment in and out of the van. Mr. Dan Dan has offered financing at an interest rate of 8% per year over a total of five years. The financing arrangement requires a down payment now of 25% of the initial cost. Compute the cost per year to finance the van over the five year loan. The 501st believes that they will keep the van for a total of ten years. They plan to sell the van for $7,000 after ten years of use. The operating and maintenance cost of the van is expected to be $450 per year. If the 501st uses a Minimum Attractive Rate of Return (MARR) of 6% per year, what is the annual owning cost to the nearest cent per year over the ten-year life of the van? Include a cash flow diagram with your solution.

Answer 1

First of all lets calculate down payment

Down payment = 45000*25% = $11,250

Now to calculate EMI or cost per year , following formula can be used

EMI=Loan/PVIFA(r,n)

=(45,000-11,250)/PVIFA(8%,5)

=33,750/3.9927

=$8452.91

II) Financial cost over 10 years

Parrticulars	0	1	2	3	4	5	6	7	8	9	10
Cash outflow/(Inflow)	$ 11,250	$    8,453	$    8,453	$    8,453	$    8,453	$ 8,453					$ (7,000)
PVIF @ 6%	1	0.9434	0.8900	0.8396	0.7921	0.7473	0.7050	0.6651	0.6274	0.5919	0.5584
Present value	$ 11,250	$    7,974	$    7,523	$    7,097	$    6,695	$ 6,317	$      -	$      -	$      -	$      -	$ (3,909)	$ 42,948