Question

1 of 2 Case 6 Lease a Lot Round Table Rental Yards provides construction equipment, trailers, crutches, etc, on short- term rentals. Historically, Art, the owner, has purchased the items that he rents out, but his business has been expanding so rapidly that he is considering both straight leases and lease- purchase arrangements. He has decided to use the procurement of a new bulldozer with a list price of S290,000 as a test case. If he purchases the bulldozer outright, then he must also decide whether he should plan on overhauling it or selling it after 3 years. This overhaul will cost about $150,000, but it should double the useful life of the bulldozer. However, the bulldozer's value on the used market would drop from $180,000 after Year 3 to $135,000 after Year 6. Its annual operation and maintenance costs will start at $25,000 and increase by $7500 each year. This increase is due to increased use more than to increased age, so it is not affected by the overhaul. The manufacturer has a subsidiary that specializes in financing through leases and lease- purchases. In both cases, the subsidiary uses a term of 5 years with no option to extend it further. Art believes that other contract periods could be negotiated, but for this initial analysis he believes that their standard term is representative of the other possibilities. For the standard lease, the annual payment is $45,000. For the lease-purchase, the annual payment increases by $42,000. Although lease contracts can be written either way, for this lease Art would be responsible for the overhaul cost at Year 3 Art will insure the bulldozer for theft, catastrophic damage, and liability. This policy will cost him $9500 each year. He will spend about 5% of the rental income transporting it to and

Answer 1

Option 1) If secured loans are out there for 9%, that finance plan does one recommend?

Solution– The finance set up which might be suggested below the given conditions is to make the annual payment lease of $45,000 which can increase after a period of time. Among the on top of 2 plans, it's been recommened to use the primary finance plan. Apart from that, he pays his regular expenses on the basis of the fixed expenses and rental income. He additionally must determine the current price of cost of $9,500 for 5 years which will pop out to be $13,500. His expenses can increase over the time as a result of rise in value of money. Considering the value of bulldozer also over the years, he will take under consideration the current price of the overhauling cost $150,000 however it'll profit also by doubling the general age of the bulldozer. the current value are $168,000.

On the other hand, he must decide upon the useful cost of investment into bulldozer. Therefore, by taking the charges over the lease would be a lot of useful because in that he may earn the most interest on the amount that is however to be paid. Also, the calculation of the ultimate price of the bulldozer ought to be done according to the prices to be paid and also the overall cost of the bulldozer.

Option 2)

Solution: The tax issues can change the preference of financial planning as a result of with five year MACRS, it'll increase the cost accounting with the extra taxation to be paid over the payment of the worth of the bulldozer in installments. it'll increase the costing of the first plan by 41% of [(25,000)+(0.41*7,500*6)] = $43,450. Therefore, under such conditions second plan would be quite victorious.