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P6 10 week 4 excercise - It is used in capital budgeting...

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Dunn Inc. (Purhase or Lease Analysis) Rate - 10% 1 0.91 0.83 0.75 0.68 0.62 0.56 Purchase Site for Contruction Year 0 1 2 3 4 5 6 Down Payment 400,000 Loan & Interest 350,000 350,000 350,000 350,000 350,000 Property tax 40,000 40,000 40,000 40,000 40,000 40,000 Insurance 27,000 27,000 27,000 27,000 27,000 27,000 Other 16,000 16,000 16,000 16,000 16,000 16,000 Sale of property Total Cash Outflow 400,000 433,000 433,000 433,000 433,000 433,000 83,000 Totals of NPV 400,000 393,636 357,851 325,319 295,745 268,859 46,851 Lease Year 0 1 2 3 4 5 6 Deposit Required 100,000 Annual Rent 270,000 270,000 270,000 270,000 270,000 270,000 Returned Dep. Total Cash Outflow 100,000 270,000 270,000 270,000 270,000 270,000 270,000 Totals of NPV 100,000 245,455 223,140 202,855 184,414 167,649 152,408 Which of the two approaches should Dunn Inc. follow? The NPV is the difference between present value inflows and outflows.
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Unformatted text preview: It is used in capital budgeting and In this case the lease option results in less out of pocket. This option has less NPV on the outflows. The lease option should be chosen. 0.51 0.47 0.42 0.39 0.35 0.32 7 8 9 10 11 12 40,000 40,000 40,000 40,000 40,000 40,000 27,000 27,000 27,000 27,000 27,000 27,000 16,000 16,000 16,000 16,000 16,000 16,000 500,000 83,000 83,000 83,000 83,000 83,000 417,000 42,592 38,720 35,200 32,000 29,091 132,869 2,132,996 7 8 9 10 11 12 270,000 270,000 270,000 270,000 270,000 270,000 100,000 270,000 270,000 270,000 270,000 270,000 170,000 138,553 125,957 114,506 104,097 94,633 54,167 1,907,834 d to help determine if a project is profitability....
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