Problem 3 (20 pts) . A bulldozer can be purchased for $380,000 and used for 6 ye

Question

Problem 3 (20 pts) . A bulldozer can be purchased for $380,000 and used for 6 years, when its salvage value is 15% of the first cost. Alternatively, it can be leased for S60,000 a year. (Remember that lease payments occur at the start of the year.) The firm's interest rate is 12%. a) b) c) What is the interest rate for buying versus leasing? Which is the better choice? (6 pts) What the benefits/costs ratio for bying versus leasing? Which is the better choice? (6 pts) If the firm will receive $65,000 more each year than it spends on operating and maintenance costs, should the firm obtain the bulldozer? What is the rate of return for the bulldozer using the best financing plan? (8 pts) Analysis:

Explanation / Answer

A bulldozer can be purchased for $380,000 and used for 6 years, when its salvage value is 15% of the first cost. Alternatively, it can be leased for $60,000 a year. Remember that lease payments occur at the start of the year. The firm’s interest rate is 12%.a)What is the interest rate for buying ver…
For the first part of this problem, we need to find the benefit-cost of purchasing the bulldozer. We do this by taking 380000 and subtract the yearly interest. We do this by the eqution p/(1 r)^t so we have 380000/1.12^6 and obtain 192,519.83, this is the valus we received from buying. We now have to add our salvage value which is 380000*.15=57000 We add these numbers and subtract them from our cost. (192519.83+57000)-380000=-130480.17. This result is the benefit we did not receive from purchasing the bulldozer. Next we find the benefit-cost of leasing the bulldozer for 6 years. This is done by adding (60000*1.12)*(6))=403200 for our total cost. which is far more than buying the bulldozer. Therefore, the wise decision is to buy the bulldozer. For part b, each case will receive 65000*6years=390000. This will be added to the benefit of both the purchase and lease proposal. The result gives us 390000-130480.17=259519.83 benefit for purchasing and 390000-403200=-13800 benefit. In this case cost exceed benefit and should not be considered. The best case is to purchase for both cases at an interest rate of 12%.

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