4/19/2010 Chapter 18. Ch 18-06 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 5-year 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 After-tax 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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