S A Tool Maker Shop must borrow $20,000 to purchase an equipment the local bank

Question

S A Tool Maker Shop must borrow $20,000 to purchase an equipment the local bank has offered the following choice of payment Plans, each determined by using an interest rate of 12%. If the Shop's minimum attractive rate of return (MAR) is 15%. which plan should he choose? Expiain in desal your setap Formula, Calculation, and recommendation. Plan A: $ 5010 per year for 5 years Plan B: $2956 per year for 4 years plus $15,000 at end of 5 years Plan C: Nothing for 2 years, then $9048 per year for 3 years

Explanation / Answer

Solution:

PWC-A = 5,010(P/A, 15%,5) = 16,794

PWC-B = 2,956 (P/A, 15%,4) + 15,000 (P/F, 15%,5) = $15,897

PWC-C = 9,048 (P/A, 15%,3) (P/A, 15%,2) = $15,618

Plan C has the lowest cost, thus choose Plan C

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