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: Option 1. A conventional fixed loan at an interest rate of 10% over 10 years, with 120 equal monthly payments. Option 2. A graduated payment schedule at 9% interest, with the following monthly payment schedule, payments are made at the beginning of each month of the first year: Year 1 2 3 4 5 6 7 8 9 10 11 12 Monthly payment 25 20 30 22 35 23 36 25 21 33 34 25 (thousand dollars) Option 3. A variant interest rate monthly payment over six years, with the following interest rate schedule. In this option, the lowest payment is for the first year and each subsequent payment will be just 1% over the previous one until the end of the third year and the payments will be constant afterwards. Year 1 2 3 4 5 6 Interest rate 12% 10% 9% 11% 14% 12% a) Compute the monthly payment under Option 1. b) What is the effective annual interest rate you are paying under Option 2? c) Compute the outstanding balance at the end of five years under each option. d) Compute the total interest payment under each option. e) Assuming that your only investment alternative is a savings account that earns an interest rate of 6% compounded monthly, which option is a better deal? 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: Option 1. A conventional fixed loan at an interest rate of 10% over 10 years, with 120 equal monthly payments. Option 2. A graduated payment schedule at 9% interest, with the following monthly payment schedule, payments are made at the beginning of each month of the first year: Year 1 2 3 4 5 6 7 8 9 10 11 12 Monthly payment 25 20 30 22 35 23 36 25 21 33 34 25 (thousand dollars) Option 3. A variant interest rate monthly payment over six years, with the following interest rate schedule. In this option, the lowest payment is for the first year and each subsequent payment will be just 1% over the previous one until the end of the third year and the payments will be constant afterwards. Year 1 2 3 4 5 6 Interest rate 12% 10% 9% 11% 14% 12% a) Compute the monthly payment under Option 1. b) What is the effective annual interest rate you are paying under Option 2? c) Compute the outstanding balance at the end of five years under each option. d) Compute the total interest payment under each option. e) Assuming that your only investment alternative is a savings account that earns an interest rate of 6% compounded monthly, which option is a better deal
