i. Interest Rate.

Question

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Answer 1

Question

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

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Answer 2

Question

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

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Answer 3

Question

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

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Answer 4

Question

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

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Answer 5

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

Answer 6

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

Answer 7

Chapter 7, Problem 71P

To determine

i.

Interest Rate.

Answer 8

Expert Solution

Answer to Problem 71P

Interest Rate is 3.24%.

Answer 9

Expert Solution

Answer 10

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given:

Purchase Price: $ 380000

Time: 6 years

Salvage value is 15% of the first cost

Leased for $60000

Interest rate is 12%.

Calculation:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 5 years for A and 6 years for F.

Now substituting the value of variables into formula, when interest rate is 3%.

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV=

−$320000+$60000(P/A,i,5)+$57000(P/F,i,6)−$320000+60000(4.515)+$57000(0.8135)$317,269.5

Therefore, net present value is $317.269.5

The rate of return, which is between 3.00% and 3.50% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting, the values in equation, the result is as follows:

IRR = 3%+3.5%−3%$322537.5−$320000$322537.5−$317.269.5IRR = 3%+0.5%$2537.5$5268IRR = 0.0324.

Conclusion:

Therefore, the internal rate of return is 0.0324 or 3.24%

Therefore, B is the best financing plan in leasing.

Answer 13

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

Answer 14

To determine

ii.

Rate of return for the bulldozer using the best financing plan.

Answer 15

Expert Solution

Answer to Problem 71P

Rate of return for the bulldozer using the best financing plan is 8.34%.

Answer 16

Expert Solution

Answer 17

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

Given:

If the firm will receive $65000 more each year than it spends on operating and maintenance costs.

Calculation:

Calculation of Present worth of leasing to check whether company buy the bulldozer or not is as follows:

Formula to calculate the net present value is as follows:

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

P = $320000

A = $60000

F = $57000

I = ?

n = 8 years for A

n = 9 years for F

Now, substituting the value of variables into the formula(1), when interest rate is 8%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

NPV =

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.993)+$65000(0.6302)=$60928

Therefore, net present value is $60928

Now, substituting the value of variables into the formula, when interest rate is 9%

NPV = −P+A(P/A,i,n)+F(P/F,i,n)

= −$60000+$5000(P/A,i,5)+$65000(P/F,i,6)= −$60000+$5000(3.890)+$65000(0.5963)=$58209.5

Therefore, net present value is $58209.5

The rate of return, which is between 8.00% and 9.00% may indeed be computed by linear interpolation.

IRR = i%low+(i%high−i%low)Flow−PFlow − Fhigh

Substituting the values in equation, the result is as follows:

IRR = 8%+9%−8%$60928−$60000$60928−$58209.5IRR = 8%+1%$928$2718.5IRR = 0.0834

Therefore, 8.34% is the rate of return for the bulldozer using the financing plan.

Conclusion:

Therefore, the internal rate of return is 0.0834 or 8.34%.

Answer 20

Ch. 7 - Prob. 1QTC Ch. 7 - Prob. 2QTC Ch. 7 - Prob. 3QTC Ch. 7 - Prob. 4QTC Ch. 7 - Prob. 5QTC Ch. 7 - Prob. 1P Ch. 7 - Prob. 2P Ch. 7 - Prob. 3P Ch. 7 - Prob. 4P Ch. 7 - Prob. 5P

i. Interest Rate.

i. Interest Rate.

Answer to Problem 71P

Explanation of Solution

ii. Rate of return for the bulldozer using the best financing plan.

Answer to Problem 71P

Explanation of Solution

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Chapter 7 Solutions

i.

Interest Rate.

ii.

Rate of return for the bulldozer using the best financing plan.