Question
1. You decide to purchase a Macarena GT for $150,000 by putting $50,000 down and financing the remainder from the bank. You can borrow the
1. You decide to purchase a Macarena GT for $150,000 by putting $50,000 down and financing the remainder from the bank. You can borrow the money from the dealer and make 5 years of quarterly payments or make five years of monthly payments. The bank charges an APR of 22.25% for quarterly payments and 22% for monthly payments. In looking at the rates, you believe you should choose monthly b/c the APR is lower. Would that be a good choice? Support your answer mathematically. What is the periodic payment of both loans? What if the payments were made as an annuity due?
2. Your firm wants to take advantage of the 100% bonus depreciation offered in the new tax code. You are evaluating a decision to build a new factory based on a strong economy and therefore expected future growth. The expansion will cost $25 million, with expected sales of $6 million per year. Variable costs of running the factory amount to 50% of sales and fixed costs equal $1.5 million. Initial NWC needs are $1.25 million. At the end of 5 years, you expect to sell the factory for $7 million. The tax rate is 22% and the cost of capital is 9%.
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