1 of 2 Round Table Rental Yards provides construction equipment, trailers, crutc
ID: 2601812 • Letter: 1
Question
1 of 2 Round Table Rental Yards provides construction equipment, trailers, crutches, etc., on short- term rentals. Historically, Art, the owner, has purchased the items that he rents out, but his business has been expanding so rapidly that he is considering both straight leases and lease- purchase arrangements. He has decided to use the procurement of a new bulldozer with a list price of $290,000 as a test case. If he purchases the bulldozer outright, then he must also decide whether he should plan on overhauling it or selling it after 3 years. This overhaul will cost about $150,000, but it should double the useful life of the bulldozer. However, the bulldozer's value on the used market would drop from S180,000 after Year 3 to S135,000 after Year 6. Its annual operation and maintenance costs will start at $25,000 and increase by $7500 each year. This increase is due to increased use more than to increased age, so it is not affected by the overhaul. The manufacturer has a subsidiary that specializes in financing through leases and lease- purchases. In both cases, the subsidiary uses a term of 5 years with no option to extend it further. Art believes that other contract periods could be negotiated, but for this initial analysis he believes that their standard term is representative of the other possibilities. For the standard lease, the annual payment is $45,000. For the lease-purchase, the annual payment increases by $42,000. Although lease contracts can be written either way, for this lease Art would be responsible for the overhaul cost at Year 3, Art will insure the bulldozer for theft, catastrophic damage, and liability. This policy will cost him S9500 each year. He will spend about 5% of the rental income transporting it to and 69Explanation / Answer
Outright purchase price for bulldozer = $ 290000
if he purchase it outright now he will be having option to overhaul or sell it after 3 years
overhaul or takeover option cast him as follows :
Purchase price = $ 290000
Overhaul cost = $ 150000
Add: Maintenance cost = $ 47500
Total = $ 487500
Less : realisable value = $ 135000
Total cost after 6 yrs = $ 352500
If decision is to sell :
Purchase price = $ 290000
Maintenance cost = $ 47500
Total = $ 337500
Realisable value after 3 yrs = $ 180000
Total cost = $ 157500
The cost after deducting realisable value is greater in overhauling it , so its better to sell it after 3 years.
Lease or lease purchase :
Lease :
Total $ 256644.25
Lease purchase:
Total = $ 244977.25
Total outflow in lease purchase is lower than leasing so its better to choose lease purchase option.
S.no Annual payment Insurance transport t/outflow PV factor outflow 1 45000 9500 8750 63250 .917 58000.25 2 45000 9500 10250 64750 .842 54519.5 3 45000 9500 11750 66250 .772 51145 4 45000 9500 13250 67750 .708 47967 5 45000 9500 14750 69250 .650 45012.5Related Questions
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