SOLUTIONS CHAPTER 19

# SOLUTIONS CHAPTER 19 - CHAPTER 19 TERM LOANS AND LEASES...

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CHAPTER 19 TERM LOANS AND LEASES 19-1 (a) The present value of the after-tax cash outflows for the buying alternative is computed as follows: (1) Annual Loan Payment (A) \$200,000 = CF x PVAIF 5,16% (3.274) or by financial calculator: \$61,081.88 (2) Term Loan Amortization Schedule AnnualInterest Year Payment at 16% Repayment Balance 0 \$200,000 1 \$61,087\$32,000 \$29,087 170,913 2 61,087 27,346 33,741 137,172 3 61,087 21,948 39,139 98,033 4 61,087 15,685 45,402 52,631 5 61,087 8,421 52,666 - (3) After-Tax Cash Outflows Annual Tax Remaining Year Payment Interest Depr. Shield Balance 1 \$61,087\$32,000 \$40,000 \$36,000 \$25,087 2 61,087 27,346 40,000 33,673 27,414 3 61,087 21,948 40,000 30,974 30,113 4 61,087 15,685 40,000 27,842 33,245 5 61,087 8,421 40,000 24,210 36,877 (4) Present Value of After-Tax Cash Outflows After-Tax Discount Present Year Cash Outflows Factor at 10% Value 1 \$25,087 0.909 \$22,804 2 27,414 0.82622,644 3 30,113 0.75122,615 4 33,245 0.68322,706 5 36,877 0.62122,901 Aggregate Present Value = \$113,670

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(b) \$200,000 = CF + CF x PVAIF 4,14% (2.914) \$200,000 = CF (1 + 2.914) CF = 00000/3.914 CF = \$200,000 ÷ 3.914 = \$51,099 or by financial calculator: \$51,102.38 The present value of the after-tax cash outflows for the leasing alternative is computed as follows: Lease Tax After-Tax Present Value Year Payment Shield Cash Outflow at 10% 0 \$51,099 \$ 0 \$51,099 \$51,099 1-4 51,099 25,549.5 25,549.5 80,992 5 25,549.5 -25,549.5 -15,866 Present Value = \$116,225 19-2 (a) Option A Annualized lease cost (A) = \$20,000/PVAIF 3,10% = \$20,000/2.487 = \$8,042 or by financial calculator: \$8042.30 Annualized maintenance and operating cost 4,000 Total annualized cost \$12,042 Option B Annualized lease cost (A) = \$60,000/PVAIF 8,9% = \$60,000/5.535 = \$10,840 or by financial calculator: \$10,840.46 Annualized maintenance and operating cost 3,000 Total annualized cost \$13,840 On annualized cost basis, Option A is less costly than Option B. Option A Option B (b) Lease Cost + Operating Cost = Total Annualized Cost \$8,042 + x = \$13,840 x = \$5,798 As long as the annual maintenance and operating cost for Option A is less than \$5,798, Option A will remain a lower cost lease than Option B.
Option B Option A (c) Lease Cost + Operating Cost = Total Annualized Cost \$60,000/PVAIF 8,i% + \$3,000 = \$12,042 PVAIF 8,i% = \$60,000/(\$12,042-\$3,000) = 6.636 The discount factor 6.636 is found to be approximately 4.4 percent. As long as the implicit interest rate for Option B is less than 4.4 percent, Option B will be the lowest cost lease than Option A. or by financial calculator: 4.35%.

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## This note was uploaded on 02/20/2012 for the course FIN 7023 taught by Professor Wald during the Spring '12 term at The University of Texas at San Antonio- San Antonio.

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SOLUTIONS CHAPTER 19 - CHAPTER 19 TERM LOANS AND LEASES...

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