1. A construction company can purchase a used backhoe for $90,000 and spend $450iday in operating costs. The equipment will have a 5-year ife with no salvage value. Alternatively, the company can lease the equipment for $800/day. How many days per year must the company use the backhoe in order to justify its purchase? Assume i \" 8%. (12) 2 You\'re a contractor who needs to lease space for a field office during the five years of a construction project. The owner of the building where you want to rent space offers you three lease options. Each option assumes payment hebeanning of each year, and i = 4%)year which option would you a) First year annual rent of $12,000, with an increase of $2,500/year for each of the next four b) First year annual rent of $12,000, with an increase of 18%/year for each of the next four choose? years (6) years (6) c) Constant rent of $16,900/year for five years. (6) A senal bond issue of S 10.000 is offered on May 1 , 2015 paying 6% annually. Face value of the bonds is $400 each and matures in 4 years. Prepare a complete redemption schedule for this issue (rounding al values to the nearest dollar). Show appropriate column sums to verify results. (15) What would an investor pay if he or she planned to buy one of these bonds on May 1, 2017, seeking an 8% return on 3, investment? (5) What would be the price on October 1, 2017? (5) 4. Your company needs a new CAD plotter. You have two options: buy or lease. With the rapid changes in computer technology, you\'ll only keep the plotter for four years and then replace it. Your buylease options are as shown in the table below, and i 6%/year. The first year\'s payment is included in the cash outlay at signing, so annual payments are made at the end of years 1, 2 and 3. As president of the company, which option would you choose? Use any analysis method. (15) Buy $11,000 $3,500 $6,000 Show cash flow diagrams and bullet each step Circle or box final answers Value of questions shown in parenthesis.
Ans 1)
Present worh will be calculated as if CFt is cash flow to be realsied at time t when \"r\" is interst rate then CFt/(1+r)^t is how we calculate present worth
If Company pruchases used backhoe then Present worth for cost of this option
=90000+450(x)/1.08+450(x)/1.08^2+450(x)/1.08^3+450(x)/1.08^4+450(x)/1.08^5
Noe if company leases then the present worth for cost of this option
=800(x)/1.08+800(x)/1.08^2+800(x)/1.08^3+800(x)/1.08^4+800(x)/1.08^5
to justify the purchase we need to show that cost for option 1 is less than cost for option 2 for given days in a year
90000+450(x)/1.08+450(x)/1.08^2+450(x)/1.08^3+450(x)/1.08^4+450(x)/1.08^5<800(x)/1.08+800(x)/1.08^2+800(x)/1.08^3+800(x)/1.08^4+800(x)/1.08^5
257.14<x(1/1.08+1/1.08^2+1/1.08^3+1/1.08^4+1/1.08^5)=x*3.99
257.14/4=64.285<x days
hence days per year has to be more than 65 days so that we can justify the purchase
Hence it has to be 64.285 days
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