The ABD Company has decided to switch some debt to its newest division, DEMO, in order to show a more hansom corporate profit. The original amount of the debt to be transferred is $286, 400. This amount comes due on a balloon note (single payment) on July 1. 1998. The original debt carried a 11 % interest rate for three (3) years which matures on July 1, 1998.
The ABD Company has required DEMO to repay the entire debt in five (5) years. Although, the interest rate for a new company is 9.5%, DEMO's president says he has a "hook-up" at his "boy's" bank that will give the division an 8% rate (compounded monthly).
ABD has required DEIMO not to exceed $500,000 per year cash flow (total cash outlay for the year), excluding salaries and other related personnel cost.
You are the new engineer on the block, therefore, you are to do the engineering economic analysis for this situation. Analyze the repayment of the debt by using the four (4) standard repayment plans for the "hook-up" rate. Then evaluate the equivalence using the same plans at the expected interest rate for a new company.