Question

VITU TUHUwing questions, which are independent from each other. Speedy Delivery Company is considering two different machines for use in its sorting facility and the company's management put together the following cash flow estimates: Model MK6 26,000 Model DQT Purchase cost 18,000 Estimated net cash inflows: Year 1 9,000 Year 2 7,000 Year 3 5,000 Year 4 4,000 12,000 10,000 9,000 6,000

1. What is the cash payback period on each model (rounded by two decimal places)? Assuming an interest rate of 10 percent, what is the NPV of each model? Briefly explain which machines they should select.

2. You recently purchased a new home for $275,000 by agreeing to make annual payments for 15 years; if the interest rate on your loan is 4 percent, what is the total amount of interest you will pay over the life of the loan?

3. You recently received a birthday gift of $500 and you decide to save it for later use. If you deposit it into an investment account that earns 6 percent interest, how much will be in the account in 3 years?
4. You have recently opened a retirement account and decided to deposit $2500 per year in the account. If you want to retire in 45 years and the account earns 8 percent interest, how much will you have in your account when you retire>
5. You borrowed $1,200 to buy a new computer and agreed to pay the loan back 3 years later; if the loan has a 10 percent interest rate, what is the balance you will owe at that time?

6. You recently purchased a new car for $18,000 by agreeing to make equal annual payments for 5 years. If the interest rate on your loan is 8 percent, how much is each payment?

7. In 2 years, you will need $800 for a trip you planned to Costa Rica. If your account earns 4 percent interest, how much should you deposit today to reach your goal?

Answer 1

		Model DQT	Model Mk6
a	Purchase Cost	18,000	26,000
	Estimated cash inflows
b	Year 1	9,000	12,000
c	Year 2	7,000	10,000
d	Year 3	5,000	9,000
e	Year 4	4,000	6,000
f	Pay beck period	Years untill full recovery + Balance recoverable amount /cash flow during that year
g	Amount recoverable in two years (a+b)	16,000	22,000
h	Balance recoverable (a-g)	2,000	4,000
i	Third year cashflow	5,000	9,000
j	Payback period =2+h/i	2	2
1.a	Calculation of NPV	Year 1	Year 2	Year 3	Year 4	Total Inflow	Total Outflow	NPV
k	Present value factor (10% (1/1.1)^n	0.91	0.83	0.75	0.68
l	Model DQT	9,000	7,000	5,000	4,000
m	Present value (k*l)	8,182	5,785	3,757	2,732	20,456	18,000	2,456
n	Model Mk6	12,000	10,000	9,000	6,000
o	Present value (k*n)	10,909	8,264	6,762	4,098	30,033	26,000	4,033
Though the model DQT has little bit of faster payback period it is preferable to chose model Mk6 because higher NPV
2	Computation of interest	Amount in $
a	Loan Amount	275,000.00
b	Term	15 Years
c	Interest rate	0.04
d	Assuming equated annual instalment	P*r*((1+r)^n)/((1+r)^n-1))
e	(1+r)^n (r=rate, n=term)	1.80
f	(1+r)^n-1	0.80
g	Instalment (a*b*(e/f)	24,733.80
h	Total Instalements (g*15)	371,007.04
i	Interest amount (h-a)	96,007.04
3	Future value of deposit	Amount in $
a	Initial deposit	500
b	6% Annuity value for three years (1+0.6)+(1.06)^2+(1.06)^3	3.374616
c	Gift value in bank account after three years a*b	1687.308
4	Future value after 45 years by depositing monthly
a	Future value annuity factor for 8% is F = P * ([1 + I]^N - 1 )/I.
b	Yearly Payment (P)	$2,500
c	Years (N)	45
d	Rate (I)	8%
e	Future value	$966,264.04

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