Meg O\'Byte wants to buy a new computer for her business for Internet access on
ID: 2590614 • Letter: M
Question
Meg O'Byte wants to buy a new computer for her business for Internet access on a cable modem. The computer system cost is $5,100. The cable company charges $200 (including the cable modem) for instalation and has a $50 a month usage fee for businesses, paid at the end of the month. Meg expects to buy the system with a $100 down payment, financing the balance at 8 percent over the next 4 years. She will sell the computer for $1,000 when she upgrades. She expects a $500 a month increase in cash flow and is in the 25 percent tax bracket.
a. The start-up costs are _________________.
b. The PVC is _________________.
c. The PVB is _________________.
d. The monthly payment for the computer is _________________.
Explanation / Answer
a) The startup costs are = $ 100 downpayment + $ 200 ( cable modem installation)
start up costs = $ 300
b) PV of costs = $ 300 + $ 50 / [ 1+(0.08/12) ] 1 + $ 50 / [ 1+(0.08/12) ] 2 + $ 50 / [ 1+(0.08/12) ] 3 + $ 50 / [ 1+(0.08/12) ] 4 + $ 50 / [ 1+(0.08/12) ] 5 + ---------------------+ $ 50 / [ 1+(0.08/12) ] 48 + $ 1000 /
PV of costs = $ 2346.52
c) Present value of benefits = $ 500(1-0.25) / [ 1+(0.08/12) ] 1 + $ 500(1-0.25) / [ 1+(0.08/12) ] 2 + $ 500(1-0.25) / [ 1+(0.08/12) ] 3 + --------------------------+ $ 500(1-0.25) / [ 1+(0.08/12) ] 48 + $ 1000 / [ 1+(0.08/12) ] 48
Present value of benefits = $ 16,074.68
d) Monthly payment = Present value of loan / 1 - ( 1+interest rate)-n / interest rate
Monthly payment = $ 500 / 1 - [ 1+(0.08/12) ] -48 / ( 0.08/12)
Monthly payment = $ 122.06