A bond issue for $125,000 has been passed by voters to buy six minibuses for a senior citizens' transportation service. It is anticipated that the revenue from the bus service will yield a rate of return of 7% on the investment. A provision in the bond issue was that a sinking fund be establisehed through a local bank to accumulate enough money to recover the $125,000 in 6 years. The bond issue is to pay 8% simple interest (due in a lump sum at maturity), and the local bank pays annual interest of 6%.
a) what annual payment is required for sinking fund at the bank?
b) what annual return is required to recover the capital invested plus profit?
my approach for a:
FV of ammount recieved is ((125,000 * 0.08) * 6)+125,000 = 185,000
Annuity => (Annuity)(F/A, 6%, 6) = 185,000
annuity = $26,522.08
is that right?
approach for b:
not sure what to do...can i get a few hints...there's another question that says "An earth compactor costs $38,000 and has an economic life of 9 years. However, the purchaser needs it for only 1 project that will be completed in 3 years. At the end of the project, it can be sold for 1/2 its purchase price. What is the annual cost to the owner if the required rate of return is 12%?
See i don't understand what steps to take.
Please help, i don't want the answer i need to understand so i can do well on my test!
PLEASE DO NOT GIVE ME THE ANSWER!!!!
just the steps, and help me understand the terminology.
a) what annual payment is required for sinking fund at the bank?
b) what annual return is required to recover the capital invested plus profit?
my approach for a:
FV of ammount recieved is ((125,000 * 0.08) * 6)+125,000 = 185,000
Annuity => (Annuity)(F/A, 6%, 6) = 185,000
annuity = $26,522.08
is that right?
approach for b:
not sure what to do...can i get a few hints...there's another question that says "An earth compactor costs $38,000 and has an economic life of 9 years. However, the purchaser needs it for only 1 project that will be completed in 3 years. At the end of the project, it can be sold for 1/2 its purchase price. What is the annual cost to the owner if the required rate of return is 12%?
See i don't understand what steps to take.
Please help, i don't want the answer i need to understand so i can do well on my test!
PLEASE DO NOT GIVE ME THE ANSWER!!!!
just the steps, and help me understand the terminology.