How much will pay in total for the loan

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Our company has been mainly producing parts for cars with combustion engines. We are facing a challenging time. Potential shifting trends towards electric automobiles had apparently caused a reduction in our demand, that has been decreasing during the last years. In order to adapt to the future circumstances, the following different scenarios are being considered:

  1. Changing the production line to adapt to the electric automobile market.
  2. Investing in different projects to adapt to the new situation.
  3. Selling the company before facing severe losses.

There was another option on the table; a potential client has offered the possibility to sign a contract, starting in 4 years, with a duration of 8 years (so it will produce 8 payments), to purchase a specific part that we can produce, but that will require a total reconversion of the whole factory. This contract is signed for annual revenues of $800,000. To do this, we must replace the machinery and the production plant must be reconverted.

Problem a) What is the maximum amount of money we could afford to invest if we want a profitability of at least 5%?

Problem b) If we ask for a loan to be paid back in 5 years in constant equal monthly payments of $40,000, how much will we pay in total for the loan?

Reference no: EM132875074

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