You are in the process of getting your pastry shop up and running and are considering...
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You are in the process of getting your pastry shop up and running and are considering buying a commercial high-end oven that bakes your pastries to perfection. You have the following options: Brand Initial cost Life (years) Annual Maintenance Cost paid at the end of each year including the very last year Disposal value KitchenHelp ThermoBlend $425,000 $530,000 7 11 $2,500 $106,250 $1,600 $132,500 Assume that the above cash flows are nominal. The initial cost is payable now and the annual maintenance cost is payable at the end of each year over the life of the equipment. The great thing about these brands is, that they will take the ovens back at the end of the life and pay you % of its initial cost, as shown in the table. The nominal effective annual rate is 4.7% p.a. Ignore tax. A. B. Calculate the NPV for each option. Express your answer to the nearest cent. (2 marks) Calculate the EAC for each option. Express your answer to the nearest cent. (2 marks) Which brand should you choose? Why? (1 mark) C. You are in the process of getting your pastry shop up and running and are considering buying a commercial high-end oven that bakes your pastries to perfection. You have the following options: Brand Initial cost Life (years) Annual Maintenance Cost paid at the end of each year including the very last year Disposal value KitchenHelp ThermoBlend $425,000 $530,000 7 11 $2,500 $106,250 $1,600 $132,500 Assume that the above cash flows are nominal. The initial cost is payable now and the annual maintenance cost is payable at the end of each year over the life of the equipment. The great thing about these brands is, that they will take the ovens back at the end of the life and pay you % of its initial cost, as shown in the table. The nominal effective annual rate is 4.7% p.a. Ignore tax. A. B. Calculate the NPV for each option. Express your answer to the nearest cent. (2 marks) Calculate the EAC for each option. Express your answer to the nearest cent. (2 marks) Which brand should you choose? Why? (1 mark) C.
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