Solution to fm12 ch 20 p06 build a model

Solution to FM12 Ch 20 P06 Build a Model
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Unformatted text preview: 9/2/2006 Chapter 20. Solution to Ch 20-06 Build a Model a. Should the loom be leased or purchased? First, we want to lay out all of the input data in the problem. INPUT DATA Invoice Price $250,000 Length of loan 4 Loan Interest rate 10% Maintenance fee $20,000 Tax Rate 40% Lease fee $70,000 Equipment expected life 8 Expected salvage value $0 Market value after 4 years $42,500 Book value after 4 years $42,500 First, we can determine the annual loan payment that must be made on the new equipment. We will do so using the function wizard for PMT. Annual loan payment = $78,868 Year 1 2 3 4 Beginning loan balance $250,000 $196,132 $136,878 $71,698 Interest payment $25,000 $19,613 $13,688 $7,170 Principal payment $53,868 $59,254 $65,180 $71,698 Ending loan balance $196,132 $136,878 $71,698 $0 As part of its overall plant modernization and cost reduction program, Western Fabrics' management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project's required return of 12%. The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. ...
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