A farmer is considering the purchase or lease of a forklift. He can buy a new fo

Question

A farmer is considering the purchase or lease of a forklift. He can buy a new forklift or lease a new forklift. He believes that each forklift will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 10th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new forklift has a price of $11,400, a before-tax net return of -$6,100, an investment life of 10 years, and a terminal value of $8,000. If he was to lease the forklift the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 6%, the marginal tax rate is 24%, and the IRS allows him to depreciate the tractor over 14 years using the straight-line method.

(i) What is the NPV of the purchased forklift?
a. -$42,040 b. -$121,880
c. -$57,254 d. None of the answers are correct
Enter Response Here:
(ii) What is the annuity equivalent of the purchased forklift?
a. -$5,328.70 b. -$5,236.33
c. -$4,709.84 d. None of the answers are correct
Enter Response Here:

(iii) What is the NPV if the forklift was leased?
a. -$11,314 b. -$9,418
c -$21,943 d. None of the answers are correct
Enter Response Here:

(iv) What is the annuity equivalent if the forklift was leased?
a.-$3,393 b. -$2,781
c. -$3,481 d. None of the answers are correct
Enter Response Here:

(v) Which truck should this farmer choose?
a. Purchase b. Lease

Explanation / Answer

1) Statement showing NPV

Here Discount rate = 6%(1-0.24) = 4.56%

Depreciation = 11400/14 = 814$

Thus NPV = -41312

Thus ans d. None of the answers are correct

2) Annuity equivalent = PV of all cost * 1/PVIFA(4.56%,10years)

=41312 * 1/7.8894

=41321*0.12675

5236.33

Ans b : -5236.33$

3) Statement showing NPV

Thus Ans c : -21943$

4)Annuity equivalent = PV of all cost * 1/1+PVIFA(4.56%,9years)

=21943* 1/8.25

=21943*0.1212

=-2600

Ans : d.None of the answers are correct

5) he should lease the lift since in that was he will incur less expense

Year 1 2 3 4 5 6 7 8 9 10 Total Before-tax net return -6100 -6100 -6100 -6100 -6100 -6100 -6100 -6100 -6100 -6100 Depreciation 814 814 814 814 814 814 814 814 814 814 PBT -6914 -6914 -6914 -6914 -6914 -6914 -6914 -6914 -6914 -6914 PAT -5255 -5255 -5255 -5255 -5255 -5255 -5255 -5255 -5255 -5255 Add: depreciation 814 814 814 814 814 814 814 814 814 814 Cash flow -4441 -4441 -4441 -4441 -4441 -4441 -4441 -4441 -4441 -4441 Scrap value 8000 Total cash flow -4441 -4441 -4441 -4441 -4441 -4441 -4441 -4441 -4441 3559 PVIF @ 4.56 0.9564 0.9147 0.8748 0.8366 0.8002 0.7653 0.7319 0.7000 0.6694 0.6402 PV -4247 -4062 -3885 -3715 -3553 -3398 -3250 -3108 -2973 2279 -29912 Less:Initial investment 11400 NPV -41312

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