Problems
6-23 A machine has a first cost of $150,000, an annual
operation and, maintenance cost of $2500, a life of
10 years, and a salvage value of $30,000. At the end
of years 4 and 8, it requires a major service, which
costs $20,000 and $10,000, respectively. At the end
of year 5, it will need to be overhauled at a cost of
$45,000. What is the equivalent uniform annual cost
of owning and operating this particular machine?
6-24 Mr. Wiggley wants to buy a new house. It will
cost $178,000. The bank will loan 90% of the
purchase price at a nominal interest rate of 10.75%
compounded weekly, and Mr. Wiggley will make
monthly payments. What is the amount of the monthly
payments if he intends to pay the house off in
25 years?
6-25 Steve Lowe must pay his property taxes in two equal
installments on December 1 and April 1. The two
payments are for taxes for the fiscal year that be-
gins on July I and ends the following June 30. Steve
purchased a home on September 1. He estimates the
annual property taxes will be $850 per year. Assum-
ing the annual property taxes remain at $850 per year
for the next several years, Steve plans to open a sav-
ings account and to make uniform monthly deposits
the first of each month. The account is to be used to
pay the taxes when they are due.
To begin the account, Steve deposits a lump
sum equivalent to the monthly payments that will not
have been made for the first year's taxes. The savings
account pays 9% interest, compounded monthly and
payable quarterly (March 31, June 30, September 30,
and December 31). How much money should Steve
put into the account when he opens it on September 1?
What uniform monthly deposit should he make from
that time on? (A carefulexactsolution is expected.)
(Answers: Initial deposit $350.28; monthly deposit
$69.02)6-26 Claude James, a salesman, needs a new car for use in
his business. He expects to be promoted to a supervi-
sory job at the end of 3 years, and so his concern now
is to have a car for the 3 years he expects to be "on the
road." The company reimburses salesmen each month
at the rate of251iper mile driven. Claude has decided
to drive a low-priced automobile. He finds, however,
that there are three different ways of obtaining the
automobile:
(a)Purchase for cash; the price is $13,000.
(b)Lease the car; the monthly charge is $350 on a 36-
month lease, payable at the end of each month;
at the end of the 3 year period, the car is returned
to the leasing company.
(c) Lease the car with an option to purchase it at the
end of the lease; pay $360 a month for 36 months;
at the end of that time, Claude could purchase the
car, if he chooses, for $3500.
Claude believes he should use a 12% interest rate
in determining which alternative to select. If the car
could be sold for $4000 at the end of 3 years, which
method should he use to obtain it?
6-27 A motorcycle is for sale for $2600. The motorcycle
dealer is willing to sell it on the following terms:No down payment; pay $44 at the end of
each of the first 4 months; pay $84 at the
end of each month after that until the loan
has been paid in full.
Based on these terms and a 12% annual interest rate
compounded monthly, how many $84 payments will
be required?
6-28 When he purchased his home, AI Silva borrowed
$80,000 at 10% interest to be repaid in 25 equal
annual end-of-year payments. After making 10 pay-
ments, AI found he could refinance the balance
due on his loan at 9% interest for the remaining
15 years.
To refinance the loan, AI must pay the original
lender the balance due on the loan, plus a penalty
charge of 2% of the balance due; to the new lender
he also must pay a $1000 service charge to obtain the
loan. The new loan would be made equal to the bal-
ance due on the old loan, plus the 2% penalty charge,
and the $1000 service charge. Should AI refinance
the loan, assuming that he will keep the house for the
next 15 years? Use an annual cash flow analysis in
working this problem.
6-29 A company must decide whether to provide their
salesmen with company-owned automobiles or to pay
the salesmen a mileage allowance and have them drive
their own automobiles. New automobiles would cost
about $18,000 each and could be resold 4 years later
for about $7000 each. Annual operating costs would
be $600 per year plus 12,t per mile. If the sales~en
drove their own automobiles, the company probably
would pay them 30}!!per mile. Calculate the number
of miles each salesman would have to drive each year
for it to be economically practical for the company
to provide the automobiles. Assume a 10% annual
interest rate. Use an annual cash flow analysis.-- -----------