Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Chapter 6, Problem 9P
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is
How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?
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Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $310,000. The
company can borrow $310,000 for three years at 13 percent annual interest or for one year at 11 percent annual interest. Assume
interest is paid in full at the end of each year.
a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is
utilized and the loan is rolled over (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-year loan.
Interest
11 percent loan
13 percent loan
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b. What if interest rates on the 11 percent loan go up to 16 percent in year 2 and 19 percent in year 3? What would be the total interest
cost compared to the 13 percent, three-year loan?
Interest
Fixed-rate 13% loan
Variable-rate loan
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Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $430,000.
The company can borrow $430,000 for three years at 13 percent annual interest or for one year at 11 percent annual interest.
Assume interest is paid in full at the end of each year.
a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan
is utilized and the loan is rolled over (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-
year loan.
11 percent loan
13 percent loan
Interest savings
Interest
b. What if interest rates on the 11 percent loan go up to 16 percent in year 2 and 19 percent in year 3? What would be the total
interest cost compared to the 13 percent, three-year loan?
Fixed-rate 13% loan
Variable-rate loan
Additional interest cost
Interest
Galvanized Products is considering purchasing a new computer system for its enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $5,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $25,000 per year to maintain the system but will save $55,000 per year through increased efficiencies. Galvanized Products uses a MARR of 18%/year to evaluate investments. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should the new computer system be purchased?
Chapter 6 Solutions
Foundations of Financial Management
Ch. 6 - Prob. 1DQCh. 6 - Prob. 2DQCh. 6 - Prob. 3DQCh. 6 - Prob. 4DQCh. 6 - “The most appropriate financing pattern would be...Ch. 6 - Prob. 6DQCh. 6 - Prob. 7DQCh. 6 - Prob. 8DQCh. 6 - What are three theories for describing the shape...Ch. 6 - Since the mid-1960s, corporate liquidity has been...
Ch. 6 - Gary’s Pipe and Steel Company expects sales next...Ch. 6 - Prob. 2PCh. 6 - Tobin Supplies Company expects sales next year to...Ch. 6 - Antivirus Inc. expects its sales next year to be...Ch. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Boatler Used Cadillac Co. requires $850,000 in...Ch. 6 - Biochemical Corp. requires $550,000 in financing...Ch. 6 - Sauer Food Company has decided to buy a new...Ch. 6 - Assume that Hogan Surgical Instruments Co. has...Ch. 6 - Assume that Atlas Sporting Goods Inc. has $840,000...Ch. 6 - Colter Steel has $4,200,000 in assets. Short-term...Ch. 6 - Prob. 13PCh. 6 - Guardian Inc. is trying to develop an asset...Ch. 6 - Lear Inc. has $840,000 in current assets, $370,000...Ch. 6 - Using the expectations hypothesis theory for the...Ch. 6 - Using the expectations hypothesis theory for the...Ch. 6 - Carmen’s Beauty Salon has estimated monthly...Ch. 6 - Prob. 19PCh. 6 - Eastern Auto Parts Inc. has 15 percent of its...Ch. 6 - Bombs Away Video Games Corporation has forecasted...Ch. 6 - Esquire Products Inc. expects the following...
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