Tutorial 9

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Tutorial 9 – Tim Hepburn

Loan $117,000
IR 14%
Years 6
Period $0
Annual Loan Payment $30,087.43

Year
1 $117,000 $30,087.43 $16,380 $13,707.43 $103,292.57
$103,292.5
2 7 $30,087.43 $14,461 $15,626.47 $87,666.11
3 $87,666.11 $30,087.43 $12,273 $17,814.17 $69,851.93
4 $69,851.93 $30,087.43 $9,779 $20,308.16 $49,543.78
5 $49,543.78 $30,087.43 $6,936 $23,151.30 $26,392.48
6 $26,392.48 $30,087.43 $3,695 $26,392.48 $0.00
Question 1

Question 2

A.

Lease

Year 1 2 3
Tax Lease Payment 25,200 $25,200 25,200
After Tax Lease
Payment 15,120 15,120 15,120
Asset Purchase 5,000
Total after tax cash
flow 15,120 15,120 20,120
Purchase

Closing
Year Open Balance Payment Interest Principal Balance
1 60000 25844 8400 17444 42
2 42556 25844 5957.84 19886.16 2266
3 22669.84 25844 3173.7776 22670.2224 -0.3

Year Depreciation Tax Shield


1 19800 7920
2 27000 10800
3 9000 3600

After Tax Cash Flow

Year 1 2 3
Payment 25844 25844 25844
1269.5110
Interest tax shield 3360 2383.136 4
Depreciation 7920 10800 3600
After Maintained 1080 1080 1080
After Tax Cash Flow 15644 13740.864 22054.489

B.
Present Value

Cash Flow
Year Cash Flow Lease Payment PV Rate PV Lease PV Purchas
0.9259259
1 15,120 15644 3 14000 14485.18
0.8573388 12962.9629
2 15,120 13740.864 2 6 11780.57
0.7938322 15971.9046
3 20,120 22054.48896 4 9 17507.5
42934.8676
Total 5 43773.32

C.
Comparing the present value of leases and purchase we can see that the total present cash
outflow is higher for purchases than lease. Therefore, I would recommend that the firm
lease their equipment.

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