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4) If the money is borrowed, the bank loan will be at a rate of 14%, amortized
in
3 equal installments at the end of each year.
5) The tentative lease terms call for payments of $320,000 at the end of each
year for 3 years. The lease is a guideline lease.
6) Under the proposed lease terms, the lessee must pay for insurance,
property
taxes, and maintenance.
Depreciation
tax savings on depreciation
Cost of Leasing
Year 0
Lease payment
Tax savings on lease payment
market Value of Machine
Net cash flow
PV Cost of leasing $685,752.02
Part b.
For a risk averase decision maker it makes sense to discount more risky cash flows inflows at a higher discount rate
cash inflows at a lower discount rate. The residual value is the value which company will have to pay to buy the equi
at the end of lease term. The risk associated with this is much higher. But as this is not a cash inflow but a cash outflo
using a lower rate as using a higher rate would make the lease look more attractive. Hence use of lower rate is justifi
1,000,000
3 years
14%
9.24%
($430,731.48)
34%
33.33%
44.45%
14.81%
1 2 3
$430,731.48 $430,731.48 $430,731.48
$ 140,000 $ 99,298 $ 52,897
$ 47,600.00 $ 33,761.18 $ 17,984.93
1 2 3
320,000 320,000 320,000
108800 108800 108800
200,000
211,200 211,200 411,200