(Related to Checkpoint 18.2) (Calculating the cost of short-term financing) The R. Morin Construction Company needs to borrow $110,000 to help finance the cost of a new $165,000 hydraulic crane usedin the firm's commercial construction business. The crane will pay for itself in one year, and the firm is considering the following alternatives for financing its purchase:Alternative A. The firm's bank has agreed to lend the $110,000 at a rate of 13 percent. Interest would be discounted, and a 15 percent compensating balance would be required. However,the compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit (checking account) balance of $27,500 in the bank.Alternative B. The equipment dealer has agreed to finance the equipment with a 1-year loan. The $110,000 loan requires payment of principal and interest totaling $128,909.a. Which alternative should Morin select?b. If the bank's compensating-balance requirement had necessitated idle demand deposits equal to 15 percent of the loan, what effect would this have had on the cost of the bank loan alternative?a. The cost of Alternative A would be %. (Round to two decimal places.)

A borrower is required to keep a minimum deposit in their bank account, described as a compensating…

Answered: (Related to Checkpoint 18.2)…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(b) The company is considering purchasing a new delivery truck for $1,200,000. The intention is to obtain a 5-year loan from their bank, at an interest rate of 9% per annum. Annual payments are expected to be made on the loan. Required:i. Calculate Micron Industries’ annual payment on this loan. ii. Prepare the 5-year Amortization Schedule for this loan, clearly showing the interest and principal payment annually.
Mas-Con is considering the issuance of commercial paper to fund working capital requirements of $6.4M for 50 days. Mas-Con receives quotes from a dealer of a 0.95% discount rate, a commitment fee of 0.35% on a $4.5M unused line of credit to back the commercial paper, and a dealer fee of 0.2%. What is the effective cost of this commercial paper?
Jack Toronto is the newly recruited financial analyst of Von Mining Company Ltd. He has been asked to analyze a proposal to acquire a drilling machine. He received the appropriation capital request. Von Mining Company can purchase the drilling machine for GH¢ 50,000. Von Mining Company Ltd can also lease the drilling machine for GH¢12,200 a year for a 5-year period from Trosky Leasing Ltd. The expected life of the machine is given as 5 years and expected to have a salvage value of GH¢5000 in 5 years’ time. The mining company intends to buy the drilling machine a fair market value at that time. If the mining company decides to buy the machine, it can acquire financing at 20%. It will cost the Mining Company GH¢6,000 in maintenance and insurance of the drilling machine. The tax rate is 34%. Assume depreciation is on straight line basis and lease rentals are tax deductible. (Assume payment is made at the end of the year) Required: a). Calculate NPV to Von Mining Company Ltd of the…
a) The Home Design Enterprises is considering a new project which will require RM325,000 for new fixed assets. In the initial year, the project will also require RM160,000 for additional inventory and RM35,000 for additional accounts receivable. Short-term debt is expected to increase by RM100,000 and long-term debt is expected to increase by RM300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero-book value over the life of the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net of balor expected to generate annual sales of RM554,000 and costs of RM430,000. The tax working capital returns to its original level at the end of the project. project is Hoota rate is 35% and the required rate of return is 15%. Calculate: The (exham S) i. the initial cost of this project? eriT bricii vib 16 iii. Set civ. (ex the after-tax operating cash flow for year 1 to year 4? 100 serk the cash flow for…
Bank Al Ain Islami provides a financing facility based on the Murabaha principle to Seif Construction to purchase specialized Equipment to be used for their construction project. The amount of financing is $15,000,000 at a constant rate of return of 10% for a period of 5 years. Due to some cash flow problems, Seif Construction paid the final installment in Year 6. Required: i. ii. Present a statement showing the amount of Net Receivable, Unearned Murabaha Income, and Murabaha Income for the whole duration of the contract.Prepare journal entries for Bank Al Ain Islami for the above transactions (YO-Y6).
You are considering purchasing a lot adjacentto your laundry business to provide adequate parking space for your customers. You need to borrow$75,000 to secure the lot. You have made a deal with alocal bank to pay the loan back over a five-year periodwith the following payment terms: 14%, 20%, 26%,32%, and 38% of the initial loan at the end of first,second, third, fourth, and fifth years, respectively.(a) What rate of interest is the bank earning fromthis loan?(b) What would be the total interest paid over thefive-year period?
NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available: Purchasing finance by borrowing Amount borrowed $500,000 Term of loan 5 years Interest rate 9.7% payable annually Lease plan Amount of finance $500,000 Term 5 years True interest rate 9.1% Annual instalments $128,880 Additional information The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate. Which financing option should NZ Ltd choose? Show your calculations of the cost of each financing option. Use whole numbers when rounding.
Oregon Machinery Company (OMC) has decided to acquire a screw machine. One alternative is to lease the machine on a three-year contract for a lease payment of $22,000 per year with payments to be made at the beginning of each year. The lease would include maintenance. The second alternative is to purchase the machine outright for $97,000, financing the investment with a bank loan for the net purchase price and amortizing the loan over a three-year period at an interest rate of 12% per year (annual payment = $40, 386). Under the borrow-to-purchase arrangement, the company would have to maintain the machine at an annual cost of $6,000, payable at year-end. The machine falls into the seven-year MACRS classification, and it has a salvage value of $45,000, which is the expected market value at the end of year 3. After three years, the company plans to replace the machine regardless of whether it leases or buys. The tax rate is 40%, and the MARR is 15%.(a) What is OMC's PW cost of…
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(a) To upgrade its vehicles, the project Insignia is considering undertaking, the company is exploring the option of obtaining the $10,000,000 required via a loan from its bank for a term of 4 years, at an interest rate of 12% per annum. Monthly payments are expected to be made on the loan. Required: i. Calculate Insignia Corp.'s monthly payment on this loan. ii. Prepare the company's Amortization Schedule for the first three (3) months of this loan, clearly showing the interest and principal payments.
Find the NPV for the following cash flows assuming a WACC of 10%. YR CF 0 -15,000 1 6,000 2 4,000 3 2,000 4 3,000 5 2,000

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