Econ 3050 Homework #5 Fall 2017 Cost/Benefit Analysis Applied to the Purchase of
ID: 2581729 • Letter: E
Question
Econ 3050 Homework #5 Fall 2017 Cost/Benefit Analysis Applied to the Purchase of a Consumer Durable Good Read all directions carefully and complete the assignment on the lined Response Sheets, which are the second and third page of this file. You may double-side your response sheets. If you print on two sheets, staple the sheets together in the upper left comer with the 5a response sheet on top to receive credit. Your assignment must be submitted on the Response Sheet as presented in this file to be eligible for credit. Part 1: Complete on Response Sheet Homework #5a. Part 1 is worth 10 points. Use the information below to compare, on an annual basis, the cash purchase of a Washer Dryer Combination. Assume both options yield the same basic benefits and that all items necessary for operation are included in the purchase price. Show your calculations and clearly state the annual cost of each option, following the pattern given in class, and write clearly which option is best and why it is the best option, applying the decision rules given in class. Your answer must be neat and complete to receive credit Read the assumptions for each option carefully. Loading ront om Purchase Price-tax $850 Expected Useful Life = 10 years Delivery & Installation = $75 Operating Costs = $75/year Maint & 1 Year Full Warranty Purchase Price + tax = $1,320 Expected Useful Life = 12 years Delivery & Installation = $75 Operating Costs = $50 per year Maint & Rep = 5% of purchase price year 2 year Full Warranty Rep = 10% of purchase price-year Assume annual simple interest of 2% on Savings for both options. Part II: Complete on Response Sheet Homework #5b. Part II is worth 10 points. 1. Suppose you decide to use an installment loan instead of paying cash to purchase the best option from Part I. The loan amount will equal the purchase price plus delivery and installation. What is the monthly payment on the loan if the annual interest rate on the loan is 7.2%, interest a. is compounded monthly, and the payback period is 3 years? b. c. What is the total amount of the purchase, including interest on the loan? How muc h will you pay in interest on the loan? 2. Suppose you use a 14.99% credit card for the purchase. Use the calculators at bankrate.com. a. How many months will it take to pay off the washer dryer combo purchase if you make a fixed payment of 4% of the original balance? What is the total amount paid, including interest? How much will you pay in interest for the loan?Explanation / Answer
Part 1 option 1 Toploader dry cleaners
To compare the options we must calculate net present value or the cost of Machines.
Years Particulars Cash flows Discounting factor @ 2% Present value
0 purchase price of machine 925 1 925
plus delivery and installation
1-10 Operating cost 75 8.9826 671
2-10 Repair and maintenance 85 8.0022 680
Total Present cost 2276
Annualised cost benefit of Machine 2276/10 227.6
Option 2 Front Load Machine
Years Particulars Cash flows Discounting factor @ 2% Present value
0 Purchase price of machine 1395 1 1395
plus delivery and installation
1-12 Operating cost 50 10.5753 529
3-12 Repair and maintenance 66 8.6338 570
Total Present cost 2494
Annualised cost benefit of Machine 2494/12 207.83
Conclusion:
As compared to option I that is Top load with option II that is Front Load Machine, We can conclude that annualised cost benefit of Front load Machine is lower thus select and purchase Front load machine.
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