Your company is considering the purchase of new earth moving equipment. The tota

Question

Your company is considering the purchase of new earth moving equipment. The total purchase is $240,000 and we pay with $100,000 cash and borrow the rest. (12% per year nominal, compounded monthly for 5 years). The machines last for 7 years and will be worth $35,000 at the end of 7 years. The machines will save approximately $20 per ton of dirt moved. Operating costs for the equipment are $500 per month. At the end of year 3, you will have to do an overhaul and that costs $30,000. Assume that MARR is 1.5% per month and ignore the effect of taxes and depreciation.
a. (5 points) Compute the monthly payment for the loan. Please be clear and specify the interest rate and the number of periods that you will use in the formulas.
b. (10 points) Let X = the monthly tons of dirt moved and assume that it does not change with time. Draw the cash flow diagram for this project as a function of X. Assume that

Explanation / Answer

a. 12% nominal interest rate since we need monthly payments we first find monthly IR monthly interest rate =12%/12 = 1% cash borrowed = $240000-100000 = $140000 monthly payment = 140000 * 0.01 = $1400

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