Making Decision. Consider the following situations, which each involve two options. Determine which option is less expensive. Are there unstated factors that might affect your decision?
43. You must decide whether to buy a new car for $22,000 or lease the same car over a three-year period. Under the terms of the lease, you make a down payment of $1000 and have monthly payments of $250. At the end of three years, the leased car has a residual value (the amount you pay if you choose to buy the car at the end of the lease period) of $10,000. Assume you can sell the new car at the end of three years at the same residual value. Is it less expensive to buy or to lease?
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Chapter 4 Solutions
Using & Understanding Mathematics: A Quantitative Reasoning Approach (7th Edition)
- Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 6.8 percent, has a YTM of 6.2 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.2 percent, has a YTM of 6.8 percent, and also has 13 years to maturity. The bonds have a par value of $1, 000. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 8 years? In 12 years? In 13 years? What's going on here? Illustrate your answers by graphing bond prices versus time to maturity. Do this without using excel, showing all work.arrow_forwardAshlie wants to invest $2000 and is considering using half to buy Tesla stock and the other half to buy a government bond. The future value of the stock is uncertain, but she expects it to go up by 15% per year. The bond has a guaranteed rate of 1% per year. a). Explain how splitting her investment between the stock and bond affects her risk and return from this investment. b). Is it possible for Ashlie to make a risk-free investment? c). How much will Ashlie earn on her bond investment if she leaves the money in for 20 years?arrow_forwardThree students have each saved $1000. Each has an investment opportunity in which he or she can invest up to $2000. Here are the rates of return on the students’ investment projects: Harry 5 percent Ron 8 percent Hermione 20 percent If borrowing and lending are prohibited, so each student can use only personal saving to finance his or her own investment project, how much will each student have a year later when the project pays its return? Now suppose their school opens up a market for loanable funds in which students can borrow and lend among themselves at an interest rate r. What would determine whether a student would choose to be a borrower or lender in this market? Among these three students, what would be the quantity of loanable funds supplied and quantity demanded at an interest rate of 7 percent? At 10 percent? At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate, which student(s)…arrow_forward
- Banking Wendy, a loan officer at a bank, has $1,000,000 tolend and is required to obtain an average return of 18% peryear. If she can lend at the rate of 19% or at the rate of 16%,how much can she lend at the 16% rate and still meet herrequirement?arrow_forwardA father is now planning a savings program to put his daughter through college. She is 13, plans to enroll at the university in 5 years, and she should graduate 4 years later. Currently, the annual cost (for everything - food, clothing, tuition, books, transportation, and so forth) is $20,000, but these costs are expected to increase by 6% annually. The college requires total payment at the start of the year. She now has $7,000 in a college savings account that pays 7% annually. Her father will make six equal annual deposits into her account; the first deposit today and sixth on the day she starts college. How large must each of the six payments be? Do not round intermediate calculations. Round your answer to the nearest dollararrow_forwardHale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows: State of Nature Decision Alternative Reject, S1 1 Year, S2 2 Years, S3 Produce pilot, d1 -100 50 150 Sell to competitor, d2 100 100 100 The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $5,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an…arrow_forward
- Hale's TV Productions is considering producing a pilot for a comedy series in the hope of selling it to a major television network. The network may decide to reject the series, but it may also decide to purchase the rights to the series for either one or two years. At this point in time, Hale may either produce the pilot and wait for the network's decision or transfer the rights for the pilot and series to a competitor for $100,000. Hale's decision alternatives and profits (in thousands of dollars) are as follows: State of Nature Decision Alternative Reject, S1 1 Year, S2 2 Years, S3 Produce pilot, d1 -100 50 150 Sell to competitor, d2 100 100 100 The probabilities for the states of nature are P(S1) = 0.20, P(S2) = 0.30, and P(S3) = 0.50. For a consulting fee of $5,000, an agency will review the plans for the comedy series and indicate the overall chances of a favorable network reaction to the series. Assume that the agency review will result in a favorable (F) or an…arrow_forwardThe cost to purchase the house that Bainters are considering is $195,000 but the Bainters plan to make a $40,000 down payment. The Bainters have been approved for a fixed-rate, 30-year mortgage with a 4.2% annual interest rate for the remaining costs. The Bainters want to know how much they would pay on their loan each year as well as how much they would pay on their loan after 5 years, 10 years, 15 years, and 30 years. They also want to determine how much they would pay in interest on their loan when they repay the entire loan. What are the amounts? Your answer should include (remember to show or explain your calculations) the total amount paid in loan payments after 1 year the total amount paid in loan payments after 5 years the total amount paid in loan payments after 10 years the total amount paid in loan payments after 15 years the total amount paid in loan payments after 30 years the total amount of interest paid on the loan when it is repaidarrow_forwardA year after declaring bankruptcy and moving with her daughter back into her parents’ home, June Maffeo is about to get a degree in nursing. As she starts out in a new career, she also wants to begin a new life—one built on a solid financial base. June will be starting out as a full-time nurse at a salary of $52,000 a year, and she plans to continue working at a second (part-time) nursing job with an annual income of $10,500. She’ll be paying back $24,000 in bankruptcy debts and wants to be able to move into an apartment within a year and then buy a condo or house in five years. June won’t have to pay rent for the time that she lives with her parents. She also will have child care at no cost, which will continue after she and her daughter are able to move out on their own. While the living arrangement with her parents is great financially, the accommodations are “tight,” and June’s work hours interfere with her parents’ routines. Everyone agrees that one more year of this is about all…arrow_forward
- If you need to take out a $30,000 student loan 2 years before graduating, which loan option will result in the lowest overall cost to you: a subsidized loan with 6.7% interest for 10 years, a federal unsubsidized loan with 5.6% interest for 10 years, or a private loan with 6.0% interest and a term of 14 years? How much would you save over the other options? All payments are deferred for 6 months after graduation and the interest is capitalized.arrow_forwardFor the past two years, Monroe Corporation’s statement of cash flows has shown net cash provided by investing activities. Which of the following choices could explain this result? (a) Collection of accounts receivable balances (b) Sales of factory equipment (c) Receipt of cash dividends from investments in other company’s stock (d) Issuance of long-term debtarrow_forwardISEM Power is considering the acquisition a local Waste-to-Energy plant which produces electricity for the energy market by burning wastes collected from the community. The investment will cost the company an initial cost of $32 million which will be funded by taking a 5-year bank loan at an interest rate of 10% per year. The loan will be repaid with 5 equal end-of-year payments. Annual profits from the sales of electricity generated by the plant to the power grid are estimated to be $4 million in year 1 to year 10, and $6 million in year 11 to year 20. All cash flows are assumed to occur at the end of each year. The plant has a useful life of 20 years with a salvage value of $1 million. The company MARR is 12%. qns: What is the MIRR of the project if the financing rate is 10% and the reinvestment rate is 12%?arrow_forward
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