Question

Northwest Iron and Steel is considering getting involved in electronic commerce. A modest e-commerce package is available for $20,000. If the company wants to recover the cost in 2 years, what is the equivalent amount of new income that must be realized every 6 months, if the interest rate is 3% per quarter compounded quarterly?

Answer 1

$5784

Step-by-step explanation:

Company must recover semi-annual (6 mo) revenues, for 2 years; so 4 payment uniform series, you need to find A.

CFD time-period is 6 months, so your i_eff interest period must also be 6 months.

If i_eff must be a semi-annual rate, the nominal rate in the formula used must be a semi-annual rate. The quoted rate is 3% per quarter, which is the same as 6% semi-annual rate.

Last piece of the formula, m, is #CPs in 1 CFD T. Quarterly compounding,

so 2 quarters per 6-months. m=2. •ieff = (1 + 0.06/2)^2 - 1 = 0.0609 or 6.09% semi-annual effective rate. A = 20,000(A/P, 6.09%, 4) = 20,000 [0.0609(1 + 0.0609)4/[(1 + 0.0609)4-1) = 20,000(0.28919) = $5784