Chapter 6 lecture

# 65 2 eair 1060910000 1 609 5 eair another

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Unformatted text preview: .14 4 EAIR – Example – The “true” cost of each alternative: 1. 6.5% 2. EAIR = (10,609/10,000) – 1 = 6.09% 5 EAIR – Another Example EAIR • • • Reference (Another Example): Reference File: Pfe_chap06.xls Worksheet: “page 130” 6 Different compounding Different periods periods – Compounding frequency affects the true Compounding cost of a loan cost • Note: APR can mean different things (see page Note: 131-32) 131-32) • Borrow \$1,000 for a year, and either – Pay 10% annual interest for repayment of \$1,100 – Pay 9.5% APR, for a monthly rate of 0.7917% » How much will you owe at the end of the year if How the monthly rate is added to the balance at the end of each month? Reference (Another Example): File: Pfe_chap06.xls File: Worksheet: “page 131” and “page 132, top” 7 Lease vs. Purchase – The simplest approach to compare the The two alternatives is to calculate the PV of cash flows of the two alternatives cash 8 Lease vs. Purchase – Another way to approach the problem is to Another look at the differential cash flows and differential calculate their IRR calculate • If the IRR > the cost of financing, the purchase If alternative dominates the lease alternative (see p. 19) p. • Note: We are assuming that: – We will acquire the equipment (we are only making a We decisio...
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