ENSC 201 Assignment 5, Due Wednesday October 13, 2014

5.1

A motorcycle is for sale for $26,000. The motorcycle dealer is willing to sell it on the following terms:

No down payment; pay $440 at the end of each of the first four months; pay $840 at the end of each
month after that until the loan has been paid in full

At a 12% annual interest rate, compounded monthly, how many $840 payments will be required?

(This is Q. 6.24 from the OUP text, 3rd edition)

5.2

The Johnson Company pays $2,000 a month to a trucker to haul waste paper and cardboard to the city
dump. The material could be recycled if the company were to buy a $60,000 hydraulic press bailer and
spend $30,000 a year for labour to operate the bailer. The bailer has an estimated useful life of 30 years
and no salvage value. Strapping material would cost $2,000 a year for the estimated 500 bales a year
that would be produced. A waste paper company will pick up the bales at the plant and pay Johnson
$23 per bale for them. Use an annual cashflow analysis in working this problem.

(a) If interest is 8%, is it economical to install and operate the bailer?

(b) Would you recommend that the bailer be installed?

(This is Q. 6.36 from the OUP text, 3rd edition)

5.3

When he bought his home, Al Silva borrowed $280,000 at 10% interest to be repaid in 25 equal annual
end-of-year payments. After making 10 payments, Al has found he can refinance the balance due on his
loan at 9% interest for the remaining 15 years. To refinance the loan, Al must pay the original lender
the balance due on the loan, plus a penalty charge of 2% of the balance due; to the new lender he also
must pay a $1,000 service charge to obtain the loan. The new loan would be made equal to the balance
due on the old loan, plus the 2% penaltycharge, and the $1,000 service charge.

Should Al refinance the loan, assuming that he will keep the house for the next 15 years?
Use an annual cash flow analysis in working this problem.

(This is Q. 6.39 from the OUP text, 3rd edition)

5.4

A company must decide whether to provide its salespeople with company-owned cars or pay them a
mileage allowance and have them drive their own cars. New cars would cost about $28,000 each and
could be resold four years later for about $11,000 each. Annual operating costs would be $1,200 a year
plus $0.12 per kilometer. If the salespeople drove their own cars, the company would probably pay
them $0.50 per kilometer. Calculate the number of kilometers each salesperson would have to drive
each year for it to be economically practical for the company to provide the cars. Assume a 10% annual
interest rate. Use an annual cash flow analysis.

(This is Q. 6.40 from the OUP text, 3rd edition)

5.5

A manufacturer is considering replacing a production machine tool. The new machine, costing $37,000,
would have a life of four years and no salvage value, but it would save the firm $5,000 a year in direct
labour costs and $2,000 a year in indirect labour costs. The existing machine tool was purchased four
years ago at a cost of $40,000. It will last four more years and will have no salvage
value at the end of that time. It could be sold now for $10,000 cash. Assume that money is worth 8%
and that the difference in taxes, insurance, and so forth for the two alternatives is negligible. Use an
annual cash flow analysis to determine whether the new machine should be bought.

(This is Q. 6.42 from the OUP text, 3rd edition)