Question

Solve the following problem using a spreadsheet. Your C corporation needs a new track hoe for its operations and is looking at three alternatives. The first alternative is to lease the track hoe for 60 months. The monthly lease payment is $2,200 per month. At the end of the lease, the track hoe will be returned to the dealer. The lease excludes all maintenance and operational costs. The second alternative is to purchase the track hoe with a 60-month loan at an interest rate of 7.5% (APY 7.76). The loan has $500 in origination fees. The track hoe’s entire sales price of $110,000—including the loan origi- nation fees—can be financed. The first payment is due in July. The third alternative is to purchase the track hoe with cash for $110,000. If your company purchases the track hoe, the estimated salvage value of the track hoe at the end of five years is $15,000. Gains and losses on the 8. sale of the track hoe will be treated as ordinary income. The track hoe may be depreciated using the half-year convention. For all three alternatives, the track hoe is to be placed in service on July 1. Your company’s tax year is the same as the calendar year and its marginal tax rate is 35%. Using the net present value (cost) method, which of the above alternatives is the best for your com- pany if your MARR is 15% per year (1.25% per month)? Assume that there is sufficient taxable income to use all tax savings in the year they occur.

and write up your reason for your selection. Marginal Tax Rate Lease Payent2,200.00 Purchase Price 110,000.00 Loan Interest Rate $ 15,000.00 Leasin 0 # of Months (13,200 (26,400) 4 (13,200) Cost of Lease Less Tax Savings After Tax Cost Present Value 7 (8,580)17,160) (17,160(17,160 17,160) (7.461) (11,283) Net Present Value $. (13,285) $ (26,570) $ (26,570) $ (26,570) $ (26,570) $ (13,285) Less Tax 9,100 147449,282 5,7505,130 ,932) (1,218) (4,185) (17,288) (11,367) (21,440) (11,904) Net Present Value Taxable Income Interest $4,000$6,925 $5,400$3,756$1,985$ $22,000$35,200 21,120 12,672 12,672 6,336 $26,000 $42,125 $ 26,520 $16,428 14,657 $(8,378) $ 9,100 $ 14,744 $ 9,282 $ 5,750 $ 5,130 $ (2932) Purchase 0 6 $(110,000) AfterTax Cost 1 5,174 Net Present Value 866 Taxable Income Depreciation $22,000$35,200 $21,120$12,672$12,672 6,336 $ 22,000 $ 35,200 $ 21,120 $ 12,672 $ 12,672 (8,664) sZ,T0O$12,320$ 392$4,4354,435 (3,032)

Answer 1

In the first alternative net present value (cost) is (53771).

In the second alternative where the new track hoe is to be taken from loan @ 7.5%, net present value is (47039).

And in the third alternative where the new track hoe is to be taken as of cash payment, net present value is (64866).

Therefore C corporation should use second alternative of purchased a new track hoe by taking a 60-month loan @ 7.5%.Because second alternative is showing least cost as compared to other two alternatives.

In the net present value (cost) method, the option to be chosen is based on least cost to be paid by corporation.

Hence, after considering all the values of spreadsheet, C corporation should purchased a 60-month loan @ 7.5% interest which is the least cost option as compared to the others.

In the first and third option, cost to the C corporation is higher as compared to second option.