h blem 20 pts-A bulldozer can years, when its salvage value is 15% of the first
ID: 2565146 • Letter: H
Question
h blem 20 pts-A bulldozer can years, when its salvage value is 15% of the first cost. Alternatively, it can be leased for S60,000 a year. (Remember that lease payments occur at the start of the year.) The firm's interest rate is 12%. be purchased for $380,000 and used for 6 a) b) c) What is the interest rate for buying versus leasing? Which is the better choice? (6 pts) What the benefits/costs ratio for bying versus leasing? Which is the better choice? (6 pts) If the firm will receive $65,000 more each year than it spends on operating and maintenance costs, should the firm obtain the bulldozer? What is the rate of return for the bulldozer using the best financing plan? (8 pts) Analysis:Explanation / Answer
Solution:
(a) Salvage = 0.15 x $380,000 = $57,000
Year
Purchase
Lease
Purchase – Lease
0
-$380,000
-$60,000
-$320,000
1
0
-$60,000
$60,000
2
0
-$60,000
$60,000
3
0
-$60,000
$60,000
4
0
-$60,000
$60,000
5
0
-$60,000
$60,000
6
$57,000
0
$57,000
NPW = 0
0 = -320,000 + 60,000 (P/A, IRR, 5) + 57,000 (P/F, IRR, 6) and interpolating
IRR = 3% + 0.5% [2538/(2538-2730)]
IRR = 3.24%
The IRR is well below the firm’s interest rate on the borrowed amount ($320,000) from leasing, so lease the bulldozer.
b. Purchase
Benefit cost ratio, B-C ratio
NPV = -380,000 + $57,000 (P/F, 12%, 6)
NPV = -380,000 + $28,877.97
NPV = -351,122.03
B-C ratio = -351,122.03/-380,000 = 0.924
Lease
NPV = -60,000 + 60,000 (P/A, 12%, 5)
NPV = -60,000 + 60,000 (3.6048)
NPV = $156,286.57
B-C ratio = 156,286.57/60000 = 2.60
Since B-C ratio of lease is higher, hence lease the bulldozer.
c. The firm receives $65,000 more than it spends on operating and maintenance costs.
Year
Purchase
Lease
Purchase – Lease
0
-$380,000
-$60,000
-$320,000
1-5
0
-$60,000
$125,000
6
0
0
$122,000
NPW = 0 = -320,000 + 125,000 (P/A, IRR, 5) + 122,000 (P/F, IRR, 6) and
Interpolating
IRR = 30% + (5%)[9778/(9778 – 22346)]= 31.5%
Year
Purchase
Lease
Purchase – Lease
0
-$380,000
-$60,000
-$320,000
1
0
-$60,000
$60,000
2
0
-$60,000
$60,000
3
0
-$60,000
$60,000
4
0
-$60,000
$60,000
5
0
-$60,000
$60,000
6
$57,000
0
$57,000
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