4/19/2010
Chapter 18.
Ch 1806 Build a Model
a.
Should the loom be leased or purchased?
First, we want to lay out all of the input data in the problem.
INPUT DATA
Invoice Price
$250,000
Length of loan
4
Loan Interest rate
10%
Maintenance fee
$20,000
Tax Rate
40%
Lease fee
$70,000
Equipment expected life
8
Expected salvage value
$0
Market value after 4 years
$42,500
Book value after 4 years
$42,500
First, we can determine the annual loan payment that must be made on the new equipment. We will do so using the
function wizard for PMT.
Annual loan payment
=
Year
1
2
3
4
Beginning loan balance
Interest payment
Principal payment
Ending loan balance
MACRS 5year Depreciation Schedule
Year
1
2
3
4
5
6
Depr. Rate
20%
32%
19%
12%
11%
6%
Depr. Exp.
NPV LEASE ANALYSIS OF INCREMENTAL CASH FLOWS
Year
=
0
1
2
3
4
Cost of ownership
Purchase cost
Loan proceeds
Aftertax interest payment
Principal payment
Maintenance cost
Tax savings from maintenance cost
Tax savings from depreciation
Salvage value
Net cash flow from ownership
PV cost of ownership
Cost of leasing
Lease payment
Tax savings from lease payment
Net cash flow from leasing
PV cost of leasing
PV ownership cost @ 6%
PV of leasing @ 6%
Net Advantage to Leasing
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This note was uploaded on 10/22/2011 for the course ACCOUNTING 1102 taught by Professor Borges during the Spring '11 term at InterAmerican Recinto Metropolitano.
 Spring '11
 Borges

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