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4-3. Please provide detailed and complete solution. 3. Your company wants to get a loan to finance the purchase of earth-moving equipment. Two banks (Credit
4-3. Please provide detailed and complete solution.
3. Your company wants to get a loan to finance the purchase of earth-moving equipment. Two banks (Credit Union & National Lender) have provided you with their loan plans and you are considering to purchase Machine A or Machine B. Consider the following in answering this problem: Credit Union is financing with a nominal interest rate of 6% for the first 5 years compound quarterly and 8% afterwards also compound quarterly. National Lender is financing with an interest rate of 8% compounded annually. Machine A costs $525,000 to buy and can produce 25 yd per hour. Machine B costs $625,000 to buy and can produce 35 yd per hour. Assume equal operating and maintenance costs and that the salvage value of both machines (A & B) is zero at the end of their use (15 years). The machine will be operated for 2,000 hours per year and the company has contracts for the next 15 years to move earth for $1 per yd'. Please answer the following two questions: a. Which investment alternative (Machine A or Machine B) should be selected assuming 5% interest rate? (2.5 marks) b. Based on the machine you selected to be purchased from part a, which loan plan (Credit Union or National Lender) should be selected having into consideration that your company is willing to pay back the loan in equal installments per year for no more than 15 years. (2.5 marks)Step by Step Solution
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