Construction Methods and Management (8th Edition) CH 17 P4 Analyze the cost of r
ID: 1713901 • Letter: C
Question
Construction Methods and Management (8th Edition) CH 17 P4
Analyze the cost of renting, leasing, and purchasing a backhoe loader using the data given below. Evaluate after-tax cash flow and its present value.
Marginal tax rate = 46%
After-tax rate of return = 7%
Planned equipment use = 2000 h/year for 5 years
Present value factors (i = 7%)
Year P/F
1 0.967
2 0.904
3 0.845
4 0.790
5 0.738
End of 5 0.713
Purchase assumptions:
Cost = $100,000
Estimated resale value after 5 years = $40,000
Cost recovery method = 5-year MACRS
Down payment = $20,000
Loan terms = $80,000, 12%, 36 months
= $2,657.20/month
Interest payments:
Year Interes
$8333
5346
1979
assumptions:
of lease = 5 years
payments = $1850/month
payment = 3 months in advance
l assumptions:
period = 5 years, month to month
rate = $3375/month
Explanation / Answer
Option-1 AFTER TAX CASH FLOW UNDER LEASE OPTION Year Lease rent DCF @ 7% Dicounted Cash Flow 0 5,550 1.000 5,550.00 1 1,850 0.967 1,788.95 2 1,850 0.904 1,672.40 3 1,850 0.845 1,563.25 4 1,850 0.790 1,461.50 5 1,850 0.738 1,365.89 End of 5th Year( Leave advance recovery) (5,550) 0.713 (3,957.15) Present Value of Lease rent= 9,444.84 Tax savings @ 46% 4,344.63 After Tax Cash Flow 5,100.21 Option-2 AFTER TAX CASH FLOW UNDER RENT OPTION Year Lease rent DCF @ 7% Dicounted Cash Flow 0 - 1.000 - 1 3,375 0.967 3,263.63 2 3,375 0.904 3,051.00 3 3,375 0.845 2,851.88 4 3,375 0.790 2,666.25 5 3,375 0.738 2,491.82 Present Value of Lease rent= 14,324.57 Tax savings @ 46% 6,589.30 After Tax Cash Flow 7,735.27 Option-3 AFTER TAX CASH FLOW UNDER Borrow and Buy option Particulars US $ Down payment 20,000.00 Present Value of Loan repayment Refer Note-1 86,603.46 Present value of Terminal proceeds ( $ 40,000*0.713) (28,520.00) Present Value on Tax saved on Interest and Depreciation Refer Note-2 (39,047.72) After Tax Cash Flow 39,035.74 Note-1 PRESENT VALUE OF LOAN REPAYMENT YEAR EMI No of Months Annual Payment Interest Principal PVF PV OF TERM LOAN REPAYMENT 1 2,657 12 31,886 8,333 23,553 0.967 30,834 2 2,657 12 31,886 5,346 26,540 0.904 28,825 3 2,657 12 31,886 1,979 29,907 0.845 26,944 PRESENT VALUE 86,603 NOTE-2 Present Value on Tax saved on Depreciation Year (a) Interest (b) Depreciation (c) TOTAL (d) Tax saved on Depreciation e=(d)*46% DCF (f) Present value of tax saved on Depreciation g=e*(f) 1 8333 20000 28333 9200 0.967 8,896 2 5346 20000 25346 9200 0.904 8,317 3 1979 20000 21979 9200 0.845 7,774 4 0 20000 20000 9200 0.790 7,268 5 0 20000 20000 9200 0.738 6,793 39,048
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