Johnson Hardware wants to construct a new building at a second location. If construction could begin immediately, the cost would be $500,000. At this time, however, the owners do not have the required 20% down payment, so they plan to invest $2000 per month of their profits until they have the necessary amount. They can invest their money in an annuity account that pays 6% compounded monthly, but they are concerned about the 3% average inflation rate on construction costs. They would like you to give them some projections about how 3% inflation will affect the time required to save up for the down payment and the building's cost. They would also like to know how their projected profits, after the new building is complete, will affect their schedule for paying off the construction loan. Specifically the Johnson's would like you to prepare a report that answers the following questions. If the 3% inflation rate is accurate, how long will it take take to get the down payment? (Hint: assume inflation is compounded monthly so the required down payment will be 20% of 500,000(1+0.0312)n500,000(1+0.0312)n. Set this to the future value of the savings annuity and solve for n using a graph on your calculator. If the 3% inflation rate is accurate, what will the Johnson's total construction costs be when they have the money for the down payment? If Johnson Hardware, borrows 80% of construction costs at 7.8% compounded monthly for 15 years, what will the monthly payment be?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 1P: Talbot Industries is considering launching a new product. The new manufacturing equipment will cost...

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Johnson Hardware wants to construct a new building at a second location. If construction could begin immediately, the cost would be $500,000. At this time, however, the owners do not have the required 20% down payment, so they plan to invest $2000 per month of their profits until they have the necessary amount. They can invest their money in an annuity account that pays 6% compounded monthly, but they are concerned about the 3% average inflation rate on construction costs. They would like you to give them some projections about how 3% inflation will affect the time required to save up for the down payment and the building's cost. They would also like to know how their projected profits, after the new building is complete, will affect their schedule for paying off the construction loan. Specifically the Johnson's would like you to prepare a report that answers the following questions.

If the 3% inflation rate is accurate, how long will it take take to get the down payment? (Hint: assume inflation is compounded monthly so the required down payment will be 20% of 500,000(1+0.0312)n500,000(1+0.0312)n. Set this to the future value of the savings annuity and solve for n using a graph on your calculator.
If the 3% inflation rate is accurate, what will the Johnson's total construction costs be when they have the money for the down payment?
If Johnson Hardware, borrows 80% of construction costs at 7.8% compounded monthly for 15 years, what will the monthly payment be?
What is the total amount that the Johnson's will spend on the new building? How much is interest?

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