Timeshare Rentals, a firm that rents equipment to farmers, is considering buying

Question

Timeshare Rentals, a firm that rents equipment to farmers, is considering buying a backhoe for $525,000. The backhoe has a 10 year life and no estimated salvage value. Shipping and sales tax on the purchase of the backhoe will be an additional $12,500. Timeshare rentals uses straight line depreciation.

Timeshare Rentals estimates that the backhoe will be rented five separate times each week and that it will charge the faarmers $395 for each rental. Timeshare provides the farmers with a full tank of gas as part of the rental agreement, which will cost Timeshare an estimated $50 per rental.

(In solving this problem you must use present value tables and show them in your work below)

a) Calculate the net annual cash flow benefit that Timeshare Rentals can expect to receive from the backhoe rentals.

b) Calculate the net present value for this investment assuming Timeshare has a 10% cost of capital.

c) Calculate the approximate internal rate of return for this investment

d) If Timeshare Rentals learns that the backhoe could be sold for spare parts at the end of the 10 year period and therefore has a $28000 salvage value, by how much will this improve the net present value of the backhoe.

Explanation / Answer

Initial Price 537500 Life 10 yrs Cash inflow 395*5*52 102700 Cash outflow 50*5*52 13000 Net Annual Cash flow 89700 Note assuming 52 weeks in a year b) Cost of Capital 10% Yr CF DF @ 10% DCF 0 -537500 1 -537500 1 89700 0.909091 81545.45 2 89700 0.826446 74132.23 3 89700 0.751315 67392.94 4 89700 0.683013 61266.31 5 89700 0.620921 55696.64 6 89700 0.564474 50633.31 7 89700 0.513158 46030.28 8 89700 0.466507 41845.71 9 89700 0.424098 38041.56 10 89700 0.385543 34583.23 NPV 13667.67 c) IRR 10.59% d) Yr CF DF @ 10% DCF 0 -537500 1 -537500 1 89700 0.909091 81545.45 2 89700 0.826446 74132.23 3 89700 0.751315 67392.94 4 89700 0.683013 61266.31 5 89700 0.620921 55696.64 6 89700 0.564474 50633.31 7 89700 0.513158 46030.28 8 89700 0.466507 41845.71 9 89700 0.424098 38041.56 10 117700 0.385543 45378.45 NPV 24462.88

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