This one has stuck me - Quantitative Methods (Finance/Maths)

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?

My initial thoughts:
1. I need to calculate the repayments
2. Find the NPV (Although this would be easy in excel I am supposed to be able to do this on paper.... doing NPV with 120 calculations seems silly?
3. Compare IRR's

Maybe I need to consolidate the monthly payments/fees into 1 years expected income and then calculate using NPV using the pa interest rate?