Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,060 per year for the first 5 years, $1,860 per year for the next 10 years, and $2,770 per year for the last 5 years. Following is each vendor’s sale package. Vendor A: $56,240 cash at time of delivery and 10 year-end payments of $18,600 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,010. Vendor B: Forty semiannual payments of $9,320 each, with the first installment due upon delivery. Vendor B will perform all year end maintenance for the next 20 years at no extra charge. Vendor C: Full cash price of $144,530 will be due upon delivery. Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, from which vendor should the press be purchased? 2. Answer the following questions related to Dubois Inc. (a) Dubois Inc. has $604,600 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $88,844 at the end of each year for 11 years, and the other is to receive a single lump sum-payment of $1,724,996 at the end of the 11 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment. (b) Dubois Inc. has completed the purchase of new Dell computers. The fair value of the equipment is $831,200. The purchase agreement specifies an immediate down payment of $231,600 and semiannual payments of $73,925 beginning at the end of 6 months for 5 years. What is the interest rate, to the nearest percent, used in discounting this purchase transaction? Interest rate % (c) Dubois Inc. loans money to John Kruk Corporation in the amount of $820,000. Dubois accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Dubois needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually. What is the amount Dubois will receive on the sale of the note? (Round answers to 0 decimal places, e.g. $458,581.) Amount received on sale of note $ (d) Dubois Inc. wishes to accumulate $1,362,000 by December 31, 2022, to retire bonds outstanding. The company deposits $231,600 on December 31, 2012, which will earn interest at 10% compounded quarterly, to help in the retirement of this debt. In addition, the company wants to know how much should be deposited at the end of each quarter for 10 years to ensure that $1,362,000 is available at the end of 2022. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.) (Round answers to 0 decimal places, e.g. $458,581.)
(a) Mark Yoders wishes to become a millionaire. His money market fund has a balance of $403,884 and has a guaranteed interest rate of 12%. How many years must Mark leave that balance in the fund in order to get his desired $1,000,000?
