A. What portion of the payment made in the 230th month on a standard 20-year fix

Question

A. What portion of the payment made in the 230th month on a standard 20-year fixed rate loan goes toward interest if the stated annual interest rate is 7% and the loan value is $260,000?

$89.75

$96.83

$124.93

B.

The Warner Bros Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has both a book value and a market value of zero; it is in good working order, however, and will last physically for at least another 10 years. The proposed replacement machine will perform the operation so much more efficiently that Warner Bros’s engineers estimate it will produce after-tax cash flows (labor savings and depreciation) of $8,000 per year. The new machine will cost $35,000 delivered and installed, and its economic life is estimated to be 10 years. It has zero salvage value. The firm’s WACC is 12%, and its marginal tax rate is 40%. Should Warner Bros buy the new machine?

Yes, because the NPV is $10,202

Yes, because the NPV is $15,310

No, because the NPV is -$876

C.

Lombardo Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $5,200,000, the purchase price, at 8% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,700,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 35%. Annual maintenance costs associated with ownership are estimated at $260,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?

$143

-$749

$106

D.

Assume a discount rate of 4.3% and therefore the present value of $100 received in three years is -88.13. Further assume cash flows are entered in cells B4, C4, D4, and E4, as follows: B4 = -88.13, C4 = 0, D4 =0, and E4 = 100. I) What is the value of = NPV(.043,C4:E4)? II) What is the value of = PV(.043,B4:E4)?

I: 88.13; II: too few arguments

I: 0.043; II: 0

I: 88.13; II: 0

$89.75

$96.83

$124.93

Explanation / Answer

Calculation NPV for replacement proposal: Year Cash Flows (CF) PVF (12%) PV = CF *PVF Sale value of old machine 0 0         1.00000 $                      -   Less: Cost of new machine 0 -35000         1.00000 $           (35,000) After-tax cash flows 1 to 10 8000         5.65022 $             45,202 Net present value (Sum of PVs) $             10,202 Yes, Warner Bros should buy the new machine because the net present value is $10202

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