2. You decide to help I. M. with his analysis. A good fax machine will cost $500 and functions properly for five years. The phone company charges $300 for installing a new line and $60 a month for the line. A new delivery van costs $20,000 and can be financed for 60 months with a $4,000 down payment. I. M.s bank will finance the van at 5.5 percent compounded monthly. You calculated his weighted average cost of capital at 8 percent. You found that a 5-year-old van of this model sells for $5,000. After discussing the business venture with several retired restaurant owners at the local SCORE office, you believe that I. M., after paying his food costs, will increase his breakfast and lunch trade by $2,000 a month. I. M. can hire a part time driver for $600 a month. The vehicle depreciates straight line for five years, or $3,000 per year. I. M. is a sole proprietor and is in a 20 percent tax bracket. You estimate it will cost I. M. $300 a month to pay for maintenance, upkeep, and insurance on the van.

a. If I. M. decides to establish a delivery service and pays for the fax machine in cash, how much cash does he need now? His startup costs are down payment on van, $4,000; phone line installation, $300; fax machine, $500. Total cash required is $4,800.

b. What is the monthly payment for the delivery van? I. M. has to calculate his monthly payment by using the present value of an ordinary annuity after subtracting his down payment of $4,000 from the $20,000 cost to obtain a PV of $16,000. The formula is: