Should you buy a horse for $8000? (for the purpose of taking children for rides)
You only have $3000 of your own money (of which you can get 6% interest pa compounded monthly..)
You would need to borrow the remaining $5000 (bank charges 10% interest pa compounded monthly..)
You expect the horse to have a working life of 10 years, but the bank is only willing to give you a loan for 5 years.
Monthly Gross Returns from working with the horse are expected to be $900 each month
Fees are estimated at $400 each month
After 10 years the horse will be retired and you will collect $500 (salvage value)
a. Conduct a cost benefit analysis. Will you buy the Horse?
b. Suppose you bought the horse. Other people are interested in buying it as a pet but as it gets older the price goes down.
The price at which you can sell the camel goes down at the rate of 0.5% per month from its initial value.
You can use diminishing value depreciation calculation as an approximation of market force.
However noone wants to buy a 9 year old horse
Do you sell your beloved animal, and if so, when?
c. Suppose the bank hikes up the interest rate to 11% pa. What does this change?