The professor has two alternatives. He can have the engine overhauled at a cost of $1800 and then most likely have to pay another $800 per year for the next 2 years for maintenance. The car will have no salvage value at that time. Alternatively, a colleague offered to make the professor a $5000 loan to buy another used car. He must pay the loan back in two equal installments of $2500 due at the end of Year 1 and Year 2, and at the end of the second year he must give the colleague the car. What interest rate is the professor paying on the loan from his colleague, if the vehicle will be worth $3000 after 2 years? Is this an ethical interest rate?The “new” used car has an expected annual maintenance cost of $300. If the professor selects this alternative, he can sell his current vehicle to a junkyard for $500. Interest is 6%. Using present worth analysis, which alternative should he select and why?
The professor has two alternatives. He can have the engine overhauled at a cost of $1800 and then most likely have to pay another $800 per year for the next 2 years for maintenance. The car will have no salvage value at that time. Alternatively, a colleague offered to make the professor a $5000 loan to buy another used car. He must pay the loan back in two equal installments of $2500 due at the end of Year 1 and Year 2, and at the end of the second year he must give the colleague the car. What interest rate is the professor paying on the loan from his colleague, if the vehicle will be worth $3000 after 2 years? Is this an ethical interest rate?The “new” used car has an expected annual maintenance cost of $300. If the professor selects this alternative, he can sell his current vehicle to a junkyard for $500. Interest is 6%. Using present worth analysis, which alternative should he select and why?
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