ZuoTi.Pro
Question

A Corporation is contemplating the purchase of a piece of equipment. The Corporation can either buy...

A Corporation is contemplating the purchase of a piece of equipment. The Corporation can either buy it at Joe's Equipment Shop, which will finance the purchase with a special rate of interest or at Big Box Retailer, where they have to pay cash but the price of the equipment is lower. Joe's Equipment Shop has offered the Corporation the following "special deal." Face value 50,000 Coupon rate 1.0% Market rate ??? Term of note 7 They could by it at Big Box Retailer for the following: Fair value of the equipment 40,000 Assuming equal annual payments of principal and interest, what is the market rate of interest Joe's Equipment Shop is charging?

business   accounting   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1
face value 50000
coupon rate 1.00%
term 7
present value annuity factor 6.728
equal annual installment face value/PVAF of 1.0%@7yrs
50000/6.728
= 7431.629013
total value installment*term
7431.63*7
= 52021.40309
difference between cash and finance option 52021.40-40000
interest in 7 yrs = 12021.40309
interest/yr 12021.40/7
= 1717.343299
market rate of interest 1717343/40000*100
= 4.293358247
0 0
Add a comment
Know the answer?
Add Answer to:
A Corporation is contemplating the purchase of a piece of equipment. The Corporation can either buy...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • A firm is contemplating how to finance the purchase of a new piece of equipment that...

    A firm is contemplating how to finance the purchase of a new piece of equipment that is replace an old piece that can no longer be repaired. The new equipment is critical to operations and is expected to last 30 years or more. You had initially planned to finance the purchase of the equipment using a 30-year amortizing loan. However, the new Treasurer notes that the interest rates on two and five-year loans are much lower than current 30-year rates...

  • A firm is contemplating how to finance the purchase of a new piece of equipment that...

    A firm is contemplating how to finance the purchase of a new piece of equipment that is replaces an old piece that can no longer be repaired. The new equipment is critical to operations and is expected to last 30 years or more. You had initially planned to finance the purchase of the equipment using a 30-year amortizing loan. However, the new Treasurer notes that the interest rates on two and five-year loans are much lower than current 30-year rates...

  • A company bought a piece of equipment at the beginning of the year (January 1, 20X1)...

    A company bought a piece of equipment at the beginning of the year (January 1, 20X1) by signing the following note payable. The note is due at maturity and interest is due annually. Face value 260,000 Coupon rate 3.00% Market rate 7.40% Term 4 What is the fair value of the equipment at the time of purchase?

  • A company bought a piece of equipment at the beginning of the year (January 1, 20X1)...

    A company bought a piece of equipment at the beginning of the year (January 1, 20X1) by signing the following note payable. The note is due at maturity and interest is due annually. Face value 260,000 Coupon rate 3.00% Market rate 7.40% Term 4 What is the fair value of the equipment at the time of purchase?

  • On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly...

    On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly accounts for the equipment as a finance lease. Under the agreement, Wood will make 10 annual payments of $600,000 each January 1st. At the end of 10 years, Wood has the option of buying the equipment for $200,000, when the estimated fair value will be $400,000. If Wood's incremental borrowing rate is 7%, what is the present value of the minimum lease payments? None...

  • On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly...

    On January 1, 2017, Wood Corporation leases a piece of equipment from Prior Corporation and properly accounts for the equipment as a finance lease. Under the agreement, Wood will make 7 annual payments of $550,000 each January 1st. At the end of 7 years, Wood has the option of buying the equipment for $200,000, when the estimated fair value will be $400,000. If Wood's incremental borrowing rate is 7%, what is the present value of the minimum lease payments? $3,088,659.12...

  • On January 1, 20X1, Local Bakery started operations. The company acquired a piece of equipment by...

    On January 1, 20X1, Local Bakery started operations. The company acquired a piece of equipment by issuing a note payable on that date. The note had a below market rate of interest. Terms of the purchase of the equipment: Coupon rate Market rate Note payable $200,000 1.30% 5.90% Note term 6 years The note is due in equal annual payments of principle and interest. The company uses straight-line depreciation for book purposes. Depreciation information on the equipment: Useful life of...

  • Questions 3 - 5 use the below data. You bought a piece of equipment by signing...

    Questions 3 - 5 use the below data. You bought a piece of equipment by signing the following note payable. The note is due at maturity and interest is due annually. Face value 355,600 Coupon rate 4.3% Market rate 7.5% Term What is the amount of interest expense in year 3 under GAAP? Multiple Choice O 26,670 O 23,812 O 22,664 O 15,291

  • Your firm is considering the purchase of a new piece of equipment for $20,000. The equipment...

    Your firm is considering the purchase of a new piece of equipment for $20,000. The equipment will be straight line depreciated over four years. The salvage value (final book value) is 10 percent of the purchase price.The equipment will increase the earnings before interest, tax and depreciation by $8000 for each of the four years the equipment is used. The tax rate is 21 percent and the required rate of return is 10 percent. Should the equipment be purchased? No....

  • Questions 3 - 5 use the below data. You bought a piece of equipment by signing...

    Questions 3 - 5 use the below data. You bought a piece of equipment by signing the following note payable. The note is due at maturity and interest is due annually. Face value 355,600 Coupon rate 4.3% Market rate Term What is the ending balance of the note at the end of year 5? 17.5% Multiple Choice 0 335,168 0 302,188 0 345,015 0 355,600

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT