Homework
You are starting your own hauling/moving business in Miami. The cost of the new truck with is $55,000. If you buy it, you will have to get a loan from the bank. However, there is an option to lease the equipment. In 7 years, you plan to sell the truck and start somewhere else.
You need to make a decision to purchase the equipment or lease it. Here are the questions you need to answer:
A. Prepare a table with the pros and cons for a purchase or a lease. List the top five pros and cons for each option.
B. Prepare a table that shows the annual net costs and the NPV of cost.
C. Which is the best option to choose? Please explain why.
Use the following assumptions:
Loan
o You can secure a loan at an interest rate of 8% for 7 years. Use end of period payment.
o The loan requires a down payment on the truck of $5,000.
Lease
o The front-end charge on a 3-year lease is $3,000.
o The lease rate for the same truck is $7,500 per year for 3 years.
o The truck lease renews after three years, with a new truck included and for the same Lease terms (including the $3,000 front-end).
o A $1,000 lease penalty fee charged at the end of each 3-year leasing period.
Other information
o First year repair expense is $1,000; 2nd year, $1,500; 3rd year, $2,500; 4th year, $3,000; 5th year, $3,500; 6th year, $4,000; 7th year, $4,500.
o The truck is depreciated using $8570/year for income tax purposes.
o The market value of the purchased equipment at the end of: the first year, $50,000; 2nd year, $46,000; 3rd year, $43,000; 4th year, $40,000; 5th year, $37,000; 6th year, $34,000; 7th year, $31,000.
o The Income tax rate is 28%.
o Discount rate for calculating net present value (NPV) of the annual cost is 8%.
Attached to the homework in Canvas is an Excel Template that you can use to guide you through the calculations. Make sure the template includes all the information required for the calculations.
Hint:
a) Remember to prepare an amortization table because tax laws do not allow deduction of total loan amount.
b) You can use the PMT and NPV functions in Excel.
Format your homework according to the following formatting requirements:
(1) The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
(2) The response also includes a cover page containing the title of the homework, the student's name, the course title, and the date. The cover page is not included in the required page length.
(3) Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.
Download:- Template.rar