Monash College is purchasing a new telephone system that will last for 4 years. It can...

Monash College is purchasing a new telephone system that will last for 4 years. It can purchase the system using one of the following two options

Option A: An up-front payment of $178,000
Option B: Monthly payment of $4000 with the first payment to be made now and the last payment to be made 47 months from now.

Question

If Monash College can borrow at an annual percentage rate of 5% with monthly compounding, calculate and identify which option the Monash College should choose?
In option B, if the monthly payments were made at the end of each month, without calculation briefly explain if your answer to part 2 a) would be different.

Expert Solution

Part a.

We need to compare present value of both the options.

The Present value in option A is simply the Up-front cost of $178,000.

The Present value of option B = present value of annuity due of $4000 each for 47 months at interest rate of 5% p.a.

To find the present value of annuity, we can use manual formula

or we can also use the PV function of Excel or financial calculator as shwon below:

So the present value of that annuity is $171,125.60 which is less than option A. Thus Option B should be chosen.

Part b.

If the monthly payments were made at the end of each month, the present value of the option B would have been even lower, because at any positive rate of interest, same payments later in the time are worth less than those earlier in the time. Thus option B would still have remained the preferred choice.

jeff jeffy answered 1 year ago

A company is considering purchasing a backhoe that will cost $110,000. It will last 6 years...

A company is considering purchasing a backhoe that will cost $110,000. It will last 6 years with a salvage value of $20,000 and will reduce maintenance and operating costs by $30,000 per year. The after-tax MARR of the company is 9% and the tax rate is 55%. a) What is the exact after-tax IRR (%) for this investment?! b) What is the approximate after-tax IRR (%)?1

Question: You are starting a new project. This project would last 4 years. The following is...

Question: You are starting a new project. This project would last 4 years. The following is the input information that you have collected: Building cost (1.3% in the first year and then 2.6% every year) $12,000,000 Equipment cost (MACRS 5 years) $8,000,000 Net operating working capital requirement (% of Sales) 10% First year sales (in units) 20,000 Growth rate in units sold 0% Sales price per unit $3,000 Variable cost per unit $2,100 Fixed costs $8,000,000 Market value of building...

College GameDay is analyzing the costs of a new 3D camera system. This 4-year project has...

College GameDay is analyzing the costs of a new 3D camera system. This 4-year project has an initial asset investment of $391,492, and initial net working capital investment of $37,099, and an annual operating cash flow of -$54,592. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 15 percent. What is the project's equivalent annual cost (EAC)...

You would like to purchase a new car in 4 years after you graduate college. The...

You would like to purchase a new car in 4 years after you graduate college. The car you want to buy currently costs $35,000, but you expect the price of this model of car to increase by 5% per year for the next 4 years. How much do you have to invest today if you savings account earns 3% APR (nominal) to exactly pay for your new car? $421,657 $38,122 $42,543 $37,799 please work out and show how nominal rate...

1. A company has three new project ideas that are all expected to last 4 years....

1. A company has three new project ideas that are all expected to last 4 years. Unfortunately due to a resource constraint they can only pursue 2 of these projects. Assume the development costs for all projects are paid up front (i.e. prior to the start of the project). The specific financial projections for the three projects are: · Project 1 – Development cost would be $50,000. Projected revenues from the project are $50,000 in the first year with an...

Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The...

Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $110,000. Galvanized Products is planning to borrow 1/4th of the purchase price from a bank at 15.00% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $4,400 at that time. Over the 5-year period, Galvanized...

1. Your company is considering purchasing a new system that costs $200,500. This cost will be...

1. Your company is considering purchasing a new system that costs $200,500. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the system is expected to be sold for $35,000 cash. The system will save the firm $110,400 per year in pretax operating costs. What is the after-tax cost saving per year associated with the new system? The tax rate is 21%. A. $40,100 B. $23,184 C. $87,216 D. $110,400 2....

Floki Shipbuilding is considering purchasing a new fully integrated Computer Aided Design system. The new equipment...

Floki Shipbuilding is considering purchasing a new fully integrated Computer Aided Design system. The new equipment can be purchased for $800,000 plus shipping and installation costs of $60,000. The company has already spent $55,000 on rewiring the rooms for the new system. The new machine is expected to have a useful life of seven years, at which time it will have a value of $130,000. The company estimates it will save $180,000 in annual operating cash outflows. Floki's weighted average...

Joe is interested in driving a new SUV for three years. There are two options—purchasing or...

Joe is interested in driving a new SUV for three years. There are two options—purchasing or leasing. A local car dealer quoted him a leasing deal of $2000 down and $299 a month for 36 months. Alternative he can purchase the vehicle at $22,000 and sell the SUV in 36 months at 60% of the purchase price. Joe would like to get your help in deciding which option is best. Assume that the interest rate is 6% (APR compounded monthly).

Assume that you need a new car for exactly 4 years. You can either 1)...

Assume that you need a new car for exactly 4 years. You can either 1) lease the car for 4 years 2) purchase the car with a four-year loan and sell it after 4 years. The dealer has a leasing arrangement where you pay $4,400 today and $580 per month for the next four years. If you purchase the car, you will pay it off in monthly payments over the four years at a stated interest rate of 12...