3) Sean wants to buy a $180,000 house. He has $20,000 in cash to use as a down p

Question

3) Sean wants to buy a $180,000 house. He has $20,000 in cash to use as a down payment. The bank offers to lend Sean the remainder at a 6% annual interest rate. The term of the loan is 30 years. Compute the monthly loan payment.

7) Sammy’s Inc. is considering establishing a new machine to automate a meatpacking process. The machine will save $50,000 in labor annually. The machine can be purchased for $200,000 today and will be used for 10 years. It has a salvage value of $10,000 at the end of its useful life. The new machine will require an annual operation and maintenance cost of $9,000. The firm uses an interest rate of 10%. Do you recommend automating the process? Why? Explain thoroughly.

Please workout and explain the problem. Thanks!

Explanation / Answer

3) Loan amount after down payment (P)= 160,000 - 20,000 = 160,000

     Interest rate per month (i)= 6% / 12 = 0.5%

     Number of installment (n) = 12 * 30 = 360

Monthly loan payment (A) = 160,000(A/P, 0.5%, 360)

                                    = 160,000(0.00600)

                                          = $960

Thus, the monthly loan payment is $960.

7) Initial cost (P) = $200,000

Net annual saving after decucting annual operation and maintenance cost = 50,000 - 9,000 = $41,000

Salvage value (F) = $10,000

n = 10 years

i = 10%

Net Present Worth (NPW) = -200,000 + 41,000(P/A, 10%, 10) + 10,000(P/F, 10%, 10)

                                 = -200,000 + 41,000(6.145) + 10,000(0.3855)

                                 = -200,000 + 251,945 + 3,855

                                 = $55,800

Since NPW is positive, I would recomend automating the process.

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