2. Assume that you are the finance officer for an equipment dealer. The owner ha

Question

2. Assume that you are the finance officer for an equipment dealer. The owner has asked you to determine the markup needed for the following financing packages. Assume that you need to net (today) $250,000 on a particular machine for the dealership to break even and that the companies required rate of return is 6% AR. All payment plans are to involve monthly payments. Determine a common list price and rebate plan that will generate a $250,000 net to your company for each financing alternative. " No payments for 12 months, 36 month financing at a 2% AR." " 1% AR financing for 4 years (48 months). " " 3% AR financing with 24 monthly payments and no payments or interest for one year." a. b. C.

Explanation / Answer

.a

No Payment for 12 months.

Future Value of $250,000 after 12 months at required return of 6%=FV=PV*((1+i)^N)

I=0.06/12=0.005,N=12,PV=$250,000

FV=250000*(1.005^12)= $ 265,419

Uniform Series Present Worth Factor=PWF=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.005, N=36

PWF==(P/A,i,N)=(((1+0.005)^36)-1)/(0.005*((1+0.005)^36))= 32.87102

Amount of monthly payment required for 36 months=265419/32.87102= $ 8,075

Amount of interest charged=2%=0.02 per year

Monthly interest charged=0.02/12=0.001667

Number of months of financing=36

Uniform Series Present Worth Factor=PWF=(P/A,I,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.001667, N=36

PWF=(((1+0.001667)^36)-1)/(0.001667*((1+0.001667)^36))= 34.91284

List Price=8075*34.91284= $ 281,906

(b).

Uniform Series Present Worth Factor=PWF=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.005, N=48

PWF==(P/A,i,N)=(((1+0.005)^48)-1)/(0.005*((1+0.005)^48))= 42.580318

Amount of monthly payment required for 48 months=250000/ 42.580318= $ 5,871.26

1% AR financing:

Interest rate charged per month=0.01/12=0.0008333

PWF=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.0008333, N=48

PWF==(P/A,i,N)=(((1+0.0008333)^48)-1)/(0.0008333*((1+0.008333)^48))

PWF=47.03350587

List Price=5871.26*47.03350587= $ 276,146

(c).

No Payment for 12 months.

Future Value of $250,000 after 12 months at required return of 6%=FV=PV*((1+i)^N)

I=0.06/12=0.005,N=12,PV=$250,000

FV=250000*(1.005^12)= $ 265,419

Uniform Series Present Worth Factor=PWF=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.005, N=24

PWF==(P/A,i,N)=(((1+0.005)^24)-1)/(0.005*((1+0.005)^24))= 22.562866

Amount of monthly payment required for 24 months=265419/ 22.562866= $ 11,763.55

3% AR financing:

Interest rate charged per month=0.03/12=0.0025

PWF=(P/A,i,N)=(((1+i)^N)-1)/(i*((1+i)^N))

i=0.0025, N=24

PWF==(P/A,i,N)=(((1+0.0025)^24)-1)/(0.0025*((1+0.0025)^24))

PWF=23.26597957

List Price=11763.55*23.26597957

= $ 273,691

Common List Price can be : $ 281,906

For Option a: No discount

Option b:Discount=$5761 (281906-276146)

Option c: Discount= $    8,216 (281906-273691)

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