Adapted from a problem by S. Zeff. Lexie T. Colleton is the chief financial officer of Ragazze, and one of her duties is to give advice on investment projects Today’s date is December 31, 2008. Colleton requires that, to be acceptable, new investments must provide a positive net present value after discounting cash flows at 12% per year. A proposed investment is the purchase of an automatic gonculator, which involves an initial cash disbursement on December 31, 2008. The useful life of the machine is nine years, through 2017. Colleton expects to be able to sell the machine for cash of $30,000 on December 31, 2017. She expects commercial production to begin on December 31. 2009. Ragazze will depreciate the machine on a straight-line basis. Ignore income taxes. During 2009, the break-in year, Ragazze will perform test runs in order to put the machine in proper working order. Colleton expects that the total cash outlay for this purpose will be $20,000, incurred at the end of 2009. Colleton expects that the cash disbursements fur regular maintenance will be $60,000 at the end of each of 2010 through 2013 inclusive, and $100,000 at the end of each of 2014 through 2016 inclusive.

Colleton expects the cash receipts (net of all other operating expenses) from the sale of products that the machine produces to he $130,000 at the end of each year from 2009 through 2016, inclusive.

a. What is the maximum price that Ragazze can pay for the automatic gonculator on December 31, 2008, and still earn a positive net present value of cash flows?

b. Independent of your answer to part a, assume the purchase price is $250,000, which Ragazze will pay with an installment note requiring four equal annual installments starting December 31, 2009, and an implicit interest rate of 10% per year. What is the amount of each payment?

Required:

Using future value and present value techniques, including perpetuities to solve a variety of realistic problems, we give no hints as to the specific calculation with the problems.