Question

LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your...

LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your company from LLL, you as a financial manager have narrowed down two equipment models which meet your performance requirements equally. However, the schedule of payments of two models are different.

Model A requires yearly payment of $15,000 for 5 years with the first payment to be made today.

Model B requires yearly payment of $15,500 for 5 years with the first payment to be made end of year 1.

Given yearly interest rate of 5.5%, which model would you recommend to purchase and why?

Homework Answers

Answer #1

Present Value of Model A

P = Yearly payment = $15,000

n = 5 years

r = interest rate = 5.5%

Present Value of the payments = P + [P * [1 - (1+r)^-(n-1)] / r]

= $15,000 + [$15,000 * [1 - (1+5.5%)^-(5-1)] / 5.5%]

= $15,000 + [$15,000 * 0.192783257 / 0.055]

= $15,000 + $52,577.252

= $67,577.252

Present value of payments for Model A is $67,577.25

Present Value of Model B

P = Yearly payment = $15,500

n = 5 years

r = interest rate = 5.5%

Present Value of the payments = [P * [1 - (1+r)^-(n-1)] / r]

= [$15,500 * [1 - (1+5.5%)^-5] / 5.5%]

= [$15,500 * 0.234865646/ 0.055]

= $66,189.4093

Present value of payments for Model B is $66,189.41

Model B should be choosed since Present value of payments for Model B is lower than Model A

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your...
LuLuLime (LLL) is a company that sells modern equipment. To purchase a new equipment for your company from LLL, you as a financial manager have narrowed down two equipment models which meet your performance requirements equally. However, the schedule of payments of two models are different . Model A requires yearly payment of $15,000 for 5 years with the first payment to be made today . Model B requires yearly payment of $15,500 for 5 years with the first payment...
You are considering the purchase of new equipment which your company will use to fabricate and...
You are considering the purchase of new equipment which your company will use to fabricate and package batches of an approved drug. Are there any requirements that you should keep in mind as you debate which equipment to purchase?
Your company is considering a project which will require the purchase of $685,000 in new equipment....
Your company is considering a project which will require the purchase of $685,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $244,000. Initial net working capital equal to 30.50% of sales will be required. All of the net working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $785,000 in new equipment....
Your company is considering a project which will require the purchase of $785,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $284,000. Initial net working capital equal to 35.50% of sales will be required. All of the net working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $645,000 in new equipment....
Your company is considering a project which will require the purchase of $645,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $228,000. Initial net working capital equal to 28.50% of sales will be required. All of the net working capital will be recovered at the end of the project....
41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so...
41. Evaluating Alternative Investments. Washington Brewery has two independent investment opportunities to purchase brewing equipment so the company can meet growing customer demand. The first option (equipment A) requires an initial investment of $230,000 for equipment with an expected life of 5 years and a salvage value of $20,000. The second option (equipment B) requires an initial investment of $120,000 for equipment with an expected life of 4 years and a salvage value of $15,000. The company’s required rate of...
Your company is considering a project which will require the purchase of $815,000 in new equipment....
Your company is considering a project which will require the purchase of $815,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $296,000. Initial net working capital equal to 37.00% of sales will be required. All of the net working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $745,000 in new equipment....
Your company is considering a project which will require the purchase of $745,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $268,000. Initial net working capital equal to 33.50% of sales will be required. All of the net working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $745,000 in new equipment....
Your company is considering a project which will require the purchase of $745,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $268,000. Initial net working capital equal to 33.50% of sales will be required. All of the net working capital will be recovered at the end of the project....
Your company is considering a project which will require the purchase of $635,000 in new equipment....
Your company is considering a project which will require the purchase of $635,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $224,000. Initial net working capital equal to 28.00% of sales will be required. All of the net working capital will be recovered at the end of the project....