Happy Harvesters, Inc. owns a large combine. They know their cost for fuel, repairs and labor, but they need help calculating their current ownership costs so they can tell if the custom rates they charge for combining are high enough. They have assembled the following facts:

Current year

Estimated current value of the combine $250,000

They borrowed $150,000 (75%) from the bank @ 6% annual interest rate (60%)

They have $100,000 of their own (equity) capital invested @ 4% opportunity cost (40%)

1.) What is their average interest rate (weighted cost of capital)?

2.) What is the dollar amount of interest that should be included in calculating ownership costs for the current year?

3.) What is the dollar amount of depreciation that should be included in calculating ownership costs for the current year using an estimate of 10% of the current combine value?

4.) What is the dollar amount of taxes and insurance that should be included in calculating annual ownership costs for the current year using an estimate of 1% of the current combine value?

5.) What are the total estimated ownership costs for the current year?

Happy Harvesters can trade for a new combine for a cost of $400,000, including the value of their old combine as a trade-in. The expected salvage value of the combine after 8 years is $120,000 and their average interest rate stays the same as previously calculated.

6.) What is the average value of the combine over the eight-year period?

7.) How much is the average annual interest costs ($) that should be included in calculating ownership costs?

8.) What is the average annual depreciation of the combine over the eight-year period using the straight line method?

9.) What are the average annual insurance and tax costs assuming that together they are one percent of the average value of the combine?

10.) What is the total average ownership cost per year over the next eight years?