Question
Fox Manufacturing Co. is a well-known and big company that produces many different computer products all around the world. However, Fox started as a small
Fox Manufacturing Co. is a well-known and big company that produces many different computer products all around the world. However, Fox started as a small company in 2000 producing few computer products in El Paso, which is a city in Texas. In 2005, Oscar Smith, managing director of Fox, decided to expand the company operations by making calculated decisions as well as extensive analysis and testing with respect to all the options ahead. They noticed that as technology is racing ahead at an incredible pace, they need to manufacture products with improved performance and new features. For that, they bought a circuit board making machine for $250,000. The equipment has an estimated life of ten years and an estimated salvage value of $15,000. Fox borrowed the money from Chase Bank, which is a national bank headquartered in Manhattan, New York City. The bank offered the following three financing plans to Fox to pay off the loan:
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Option 2. A graduated payment schedule at 9% interest, with the following yearly payment schedule, payments are made at the beginning of each month of the first year:
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Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 |
yearly payment (thousand dollars) | 25 | 20 | 30 | 22 | 35 | 23 | 36 | 25 | 21 | 33 | 34 | 25
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b) What is the effective annual interest rate you are paying under Option 2?
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