Notes

Exercises: P6.7, P6.8.

Answer the following questions related to Dubois Inc.
Dubois Inc. has $600,000 to invest. The company is trying to decide between two alternative uses of the funds. One alternative provides $80,000 at the end of each year for 12 years, and the other is to receive a single lump-sum payment of $1,900,000 at the end of the 12 years. Which alternative should Dubois select? Assume the interest rate is constant over the entire investment.
Dubois Inc. has completed the purchase of new iPad tablets. The fair value of the equipment is $824,150. The purchase agreement specifies an immediate down payment of $200,000 and semiannual payments of $76,952 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?
Dubois Inc. loans money to John Kruk Corporation in the amount of $800,000. 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?
Dubois Inc. wishes to accumulate $1,300,000 by December 31, 2032, to retire bonds outstanding. The company deposits $200,000 on December 31, 2022, 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 $1,300,000 is available at the end of 2032. (The quarterly deposits will also earn at a rate of 10%, compounded quarterly.) (Round to even dollars.)

Ellison plc, 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 £1,000 per year for the first 5 years, £2,000 per year for the next 10 years, and £3,000 per year for the last 5 years. Following is each vendor’s sales package.

Vendor A: £55,000 cash at time of delivery and 10 year-end payments of £18,000 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 £10,000.
Vendor B: Forty semiannual payments of £9,500 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 £150,000 will be due upon delivery.
Instructions

Assuming that both Vendor A and B will be able to perform the required year-end maintenance, that Ellison’s cost of funds is 10%, and that the machine will be purchased on January 1, from which vendor should the press be purchased?
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