You will need to to spreadsheets for the following situations- 1- Should you lea
ID: 2519146 • Letter: Y
Question
You will need to to spreadsheets for the following situations-
1- Should you lease or should you buy a car comparison sheet? Use any auto makers promotions (for same vehicle) in regards to leasing, n, m, down payments, i, payments at signing, etc.,
2- Compare the cost of two 2018 vehicles (Honda Fit vs Toyota Prius). You can compare the different trims also. Use fuel efficiency standards from the automaker. Use $3.39 /gallon for fuel. Assume 12,000 miles per year driven, 4 oil changes per year (look at dealers websites for cost).. No salvage , no market value, 10 years analysis period. A tire change (all four) at year 8. Which car is the better deal using both NPW and EUAW analysis.
Explanation / Answer
Part 1:
Lease option:
Annual lease payment
3500
Term of lease
10
Tax rate
30%
Required rate of return
10%
Annual lease payment
3500
Less: Tax shield (3500 x 30%)
1050
Net lease payment (3500 -1050)
2450
Lease option
Year
Cash outflow net of tax shield
PV factor @10%
Present value of cash outflow
1
2450
0.909091
2227.273
2
2450
0.826446
2024.793
3
2450
0.751315
1840.721
4
2450
0.683013
1673.383
5
2450
0.620921
1521.257
6
2450
0.564474
1382.961
7
2450
0.513158
1257.237
8
2450
0.466507
1142.943
9
2450
0.424098
1039.039
10
2450
0.385543
944.5811
Present value of total cash outflow
15054.19
Purchase option:
Purchase price
28000
Residual value after 10 years
3000
Depreciation method
SLM
Depreciation tax shield (3000 x 30%)
900
Purchase option
Year
Depreciation tax shield
PV factor @10%
1
900
0.909091
818.1818
2
900
0.826446
743.8017
3
900
0.751315
676.1833
4
900
0.683013
614.7121
5
900
0.620921
558.8292
6
900
0.564474
508.0265
7
900
0.513158
461.8423
8
900
0.466507
419.8566
9
900
0.424098
381.6879
10
900
0.385543
346.989
Present value of tax shiled
5530.11
Add: present value of residual value (3000 x 0.386)
1158
Present value total benefit
6688.11
Cash outflow at the year 0
28000
Less: Present value of total benefit
6688.11
Total cash outflow under purchase option
21311.89
As can be seen that the net cash outflow is less under lease option with $15,054.19 compare to present value of net cash outflow of $21,311.89 under purchase option it is clear that leasing option is financially beneficial to the organization.
Part 2:
Honda Fit
Toyota Prius
Miles run each year
12000
12000
Fuel consumed in litre
2400
3000
Fuel cost (3.39 per gallon)
(2400 x 3.39/144)
56.5
(3000 x 3.39/144)
70.625
Oil changes cost (4 x 14)
56
56
Annual maintenance cost
112.5
126.625
The tire change cost has been assumed as following for:
Honda fir $50
And for Toyota Prius $40.
Honda Fit
Year
PV factor
Cash outlfow
1
0.909091
112.5
102.2727
2
0.826446
112.5
92.97521
3
0.751315
112.5
84.52292
4
0.683013
112.5
76.83901
5
0.620921
112.5
69.85365
6
0.564474
112.5
63.50332
7
0.513158
112.5
57.73029
8
0.466507
162.5
75.80745
9
0.424098
112.5
47.71098
10
0.385543
112.5
43.37362
Present value of total cash outflow
714.5892
Toyota Prius
Year
PV factor
Cash outflow
1
0.909091
126.625
115.1136
2
0.826446
126.625
104.6488
3
0.751315
126.625
95.13524
4
0.683013
126.625
86.48658
5
0.620921
126.625
78.62416
6
0.564474
126.625
71.47651
7
0.513158
166.625
85.50497
8
0.466507
126.625
59.0715
9
0.424098
126.625
53.70136
10
0.385543
126.625
48.81942
Present value of total cash outflow
798.5821
Thus, as can be seen that the present value of total cash outflow for Toyota Prius is higher thus, it seems that Honda Fit would be better choice to reduce the overall cost of maintenance.
Annual lease payment
3500
Term of lease
10
Tax rate
30%
Required rate of return
10%
Annual lease payment
3500
Less: Tax shield (3500 x 30%)
1050
Net lease payment (3500 -1050)
2450
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