Mary Sullivan, capital outlay manager for Waxy Widgets, has been instructed to establish a contingency fund to cover the expenses over the next two years (24 months) associated with repairing defective widgets from a new production process. Waxy Widget’s controller wants to make equal monthly cash deposits into this fund. If Mary faces the following monthly repair costs and has $1 million to start the fund today, what will be her monthly payments into the fund in order to assume that all repair costs will be covered? Mary will make her first payment one month from today, and the fund will earn a nominal rate of 6 percent, compounded monthly. Months Repair Costs per month 1-4 $500,000 5-12 $250,000 13-24 $100,000
Mary Sullivan, capital outlay manager for Waxy Widgets, has been instructed to establish a contingency fund to cover the expenses over the next two years (24 months) associated with repairing defective widgets from a new production process. Waxy Widget’s controller wants to make equal monthly cash deposits into this fund. If Mary faces the following monthly repair costs and has $1 million to start the fund today, what will be her monthly payments into the fund in order to assume that all repair costs will be covered? Mary will make her first payment one month from today, and the fund will earn a nominal rate of 6 percent, compounded monthly. Months Repair Costs per month 1-4 $500,000 5-12 $250,000 13-24 $100,000
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Mary Sullivan, capital outlay manager for Waxy Widgets, has been instructed to establish a contingency fund to cover the expenses over the next two years (24 months) associated with repairing defective widgets from a new production process. Waxy Widget’s controller wants to make equal monthly cash deposits into this fund. If Mary faces the following monthly repair costs and has $1 million to start the fund today, what will be her monthly payments into the fund in order to assume that all repair costs will be covered? Mary will make her first payment one month from today, and the fund will earn a nominal rate of 6 percent, compounded monthly.
Months |
Repair Costs per month |
|
1-4 |
$500,000 |
|
5-12 |
$250,000 |
|
13-24 |
$100,000 |
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