Probleme de Economie

Exercise 25

A company’s steel fabrication department is faced with having to replace one of its drill presses. It has received offers from three different suppliers, each of whom is willing to supply a similar machine.
1. The first offer is for €100,000 cash on delivery.
2. The second offer is €110,000 with a 5 percent annual yield, repaid over a 5-year period with equal annual installments.
3. The third offer is a leasing contract, where the company can lease the machine for 5 years at a price of €25,500 per year, prepaid.
After 5 years, the drill press will need to be replaced and have zero scrap value. When evaluating investments, the company uses a discount rate of 7 percent per year.
A. Which of the three offers should the company accept?
B. Are there any factors which might cause the company to decline the most advantageous offer?

Exercise 26

Jane and John Smith own a clothing company named J&J Fashion. They have decided to expand their shopping mall location and expect to incur a cost of approximately €1 million in connection with this. They have two alternative funding offers:
Alternative A:
A 3-year bullet (standing) loan raised in USD
Principal: USD 1,250,000
Daily exchange rate: 1.25 USD/EUR, i.e. $125 = €100
Annual fixed prepaid interest: 5 percent per year of the remaining debt

It is assumed that the exchange rate of USD to the EUR will depreciate at a 2 percent annual rate over the next three years. Furthermore, it is assumed that there are no additional costs associated with raising a loan in a foreign currency.
Alternative B:
A 3-year bond with equal payments of principal and interest in yearly installments according to the following terms:
Principal: €1,000,000
Loan application handling fee: 1% of the principal
Commitment commission: 0.5% of the principal
Stamp duty: 1.5% of the principal
Bond price: 98 i.e. when a bond with a face value of € 100 is sold at the stock exchange it will only bring in € 98. Because the nominal interest rate is lower than the effective market rate the buyers of the bonds will typically pay less than the nominal value for the bond.  
Nominal interest rate: 3% per year

A. Which of the two loan alternatives would you recommend than J&J Fashion pursue?
B. State which factors cause you to select this alternative as the most rational funding decision?