Ch 20-06 Build a Model
Should the loom be leased or purchased?
First, we want to lay out all of the input data in the problem.
Length of loan
Loan Interest rate
Equipment expected life
Expected salvage value
Market value after 4 years
Book value after 4 years
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
Beginning loan balance
Ending loan balance
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 a project 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
In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of