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Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufacturing sites. The machines cost $1.73 million each, and the supplier agreed to the following payment terms, 40% upfront, and the remainder to be paid over 4 years at an annual rate of 12%.Executives at Camber Corporation review their budgets and discover that they can pay the supplier 40% now, but their budget will only allow them to pay $4,000,000 per year for the next four years. Will that be enough to make the purchase? [Note: you are supposed to show every step of your calculation and interpret the result] Critically discuss the effect of increasing the amount paid upfront when corporations make capital purchases, focusing on the benefits and drawbacks

Question

Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufacturing sites. The machines cost $1.73 million each, and the supplier agreed to the following payment terms, 40% upfront, and the remainder to be paid over 4 years at an annual rate of 12%.

  1. Executives at Camber Corporation review their budgets and discover that they can pay the supplier 40% now, but their budget will only allow them to pay $4,000,000 per year for the next four years. Will that be enough to make the purchase? [Note: you are supposed to show every step of your calculation and interpret the result] 
  2. Critically discuss the effect of increasing the amount paid upfront when corporations make capital purchases, focusing on the benefits and drawbacks
check_circleAnswer
Step 1

1.

The actual cost of each machine is $1,730,000 and total cost to be required to purchase 10 machines is $17,300,000 (10 × $1,730,000).

The down payment is $6,920,000 (40% × $17,300,000) and the loan to be required is $10,380,000 ($17,300,000 - $6,920,000). The loan amount to be paid in 4 years and the annual interest rate is 12%.

Step 2

Calculate the annual payment as follows:

MS-Excel --> Formulas --> Financials --> PMT

=PMT(12%,4,-10*1730000* (1-40%))
Function Arguments
?
X
PMT
Rate
0.12
12%
= 4
Nper 4
-10*1730000* (1-40% )
Pv
-10380000
Fv
=number
Туре |
number
= 3417453.449
Calculates the payment for a loan based on constant payments and a constant interest rate.
Type is a logical value: payment at the beginning of the period
at the end of the period 0 or omitted.
1; payment
=
Formula result
$3,417,453.45
OK
Cancel
Help on this function
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=PMT(12%,4,-10*1730000* (1-40%)) Function Arguments ? X PMT Rate 0.12 12% = 4 Nper 4 -10*1730000* (1-40% ) Pv -10380000 Fv =number Туре | number = 3417453.449 Calculates the payment for a loan based on constant payments and a constant interest rate. Type is a logical value: payment at the beginning of the period at the end of the period 0 or omitted. 1; payment = Formula result $3,417,453.45 OK Cancel Help on this function

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Step 3

Therefore, the annual payment is $3,417,453.45. Since, CC can able to pay $4,000,000, i...

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