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Question A company wishes to make an investment of $ 20,000 in a machine with a useful life of five years and a scrap value of S 10,000. The maintenance cost of the machine is expected to be $1,000 per year. The interest rate is 9% per year. The expected revenue from the machine is as follows: Year Revenue in $ 6000 1 2 3 4 5 5000 4000 2000 2,000 Note: 1. Expenses and revenues occur at the end of the year. 2. Show all the working (a) If the company pays cash for the machine, would you advise management to undertake the investment? Why? (b) The company has obtained a bank loan of $20,000 to fund the buying of the machine. The bank gives three optional repayment plans as follows: Year Repayments Plan B Plan A Plan C 1 7,000 2,500 2,500 2 7,000 3 7,000 2,500 4 7,000 2,500 7,000 40,000 30,000 Total payments Total interest paid 15,000 Which repayment plan should the company adopt and why? 35,000 40,000 40,000 10,000 10,000

Question A company wishes to make an investment of $ 20,000 in a machine with a useful life of five years and a scrap value of S 10,000. The maintenance cost of the machine is expected to be $1,000 per year. The interest rate is 9% per year. The expected revenue from the machine is as follows: Year Revenue in $ 6000 1 2 3 4 5 5000 4000 2000 2,000 Note: 1. Expenses and revenues occur at the end of the year. 2. Show all the working (a) If the company pays cash for the machine, would you advise management to undertake the investment? Why? (b) The company has obtained a bank loan of $20,000 to fund the buying of the machine. The bank gives three optional repayment plans as follows: Year Repayments Plan B Plan A Plan C 1 7,000 2,500 2,500 2 7,000 3 7,000 2,500 4 7,000 2,500 7,000 40,000 30,000 Total payments Total interest paid 15,000 Which repayment plan should the company adopt and why? 35,000 40,000 40,000 10,000 10,000

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question A company wishes to make an investment of $ 20,000 in a machine with a useful life of five years and a scrap value of $ 10,000. The maintenance cost of the machine is expected to be $1,000 per year. The interest rate is 9% per year. The expected revenue from the machine is as follows: Year Revenue in $ | 6000 1 2 3 4 5 5000 4000 2000 2,000 Note: 1. Expenses and revenues occur at the end of the year. 2. Show all the working (a) If the company pays cash for the machine, would you advise management to undertake the investment? Why? (b) The company has obtained a bank loan of $20,000 to fund the buying of the machine. The bank gives three optional repayment plans as follows: Year Repayments Plan B Plan A Plan C 1 7,000 2,500 7,000 2,500 3 7,000 2,500 4 7,000 2,500 7.000 40,000 30,000 Total payments Total interest paid 15,000 Which repayment plan should the company adopt and why? 35,000 40,000 40,000 10,000 10,000 (c) If the company chooses to repay the loan using plan B, and decides to create a sinking fund for the purpose, how much will it save every year?
Transcribed Image Text:Question A company wishes to make an investment of $ 20,000 in a machine with a useful life of five years and a scrap value of $ 10,000. The maintenance cost of the machine is expected to be $1,000 per year. The interest rate is 9% per year. The expected revenue from the machine is as follows: Year Revenue in $ | 6000 1 2 3 4 5 5000 4000 2000 2,000 Note: 1. Expenses and revenues occur at the end of the year. 2. Show all the working (a) If the company pays cash for the machine, would you advise management to undertake the investment? Why? (b) The company has obtained a bank loan of $20,000 to fund the buying of the machine. The bank gives three optional repayment plans as follows: Year Repayments Plan B Plan A Plan C 1 7,000 2,500 7,000 2,500 3 7,000 2,500 4 7,000 2,500 7.000 40,000 30,000 Total payments Total interest paid 15,000 Which repayment plan should the company adopt and why? 35,000 40,000 40,000 10,000 10,000 (c) If the company chooses to repay the loan using plan B, and decides to create a sinking fund for the purpose, how much will it save every year?
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