General Complex Annuity: ABC Ltd is considering buying a....

[KerVin]

I have a word problem that is driving me crazy.

ABC Ltd is considering buying a new piece of equipment. It can be purchased for $500,000 and is expected to last 5 years. Interst is 8% compounded annually. At the end of its life, it can be scrapped for $50,000 in revenue. ABC has also been told that they need to purchase a monthly service contract at $2,000/month or the warranty is nul and void. Another option for them is to lease the equipment at $12,500/month - no other costs incurred as lease price includes service contract. Which option is better - buy or lease.

I know that i= 0.08/1, n=5*1, and I believe that c=1/1

When I use the formula (which I think is right) - An(due)= R(1+f)(1-1+f)-n)/f I get an answer that is $2,106,063.42 - I feel I am way off base. Where does the $2000/month come in? Scrap Revenue?

Any help you can give I would really really be appreciative!

Thanks - Ker

 

[Denis]

Re: General Complex Annuity

Looks like ABC needs to borrow the 500,000 (monthly repayments basis) at a rate of 8% cpd. annually.

You sure don't seem to be ready for this kind of problem...

Anyway, these are the steps to be taken:
1: the 8% annual rate needs to be converted to its monthly equivalent (so compounding matches payments)
2: calculate the monthly payment on a 500,000 loan over 60 months, such that 50,000 is left owing at end
3: add 2000 (service contract) to this payment
4: compare result to the 12,500 monthly lease cost

That's the way I see your problem; if I'm wrong, someone will step in :shock:

Am I gonna do more? No.