Engineering Econ HW7 Q3 3. Rental equipment is for sale for $110,000. A prospective buyer estimates he would keep theequipment for 8 years and spend $6000 a year on maintaining it. Estimated annual net receipts fromequipment rentals would be $14,400. It is estimated the rental equipment could be sold for $80,000at the end of 8 years. If the buyer wants a 7% rate of return on his investment, what is the maximumprice he should pay for the equipment?

To determine the maximum price the buyer should pay for the equipment, we need to calculate the…

Answered: 3. Rental equipment is for sale for…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 3CQQ

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Lewis’s management has been considering movingto a new downtown location, and they are concerned that these plans may come to fruition priorto the equipment lease’s expiration. If the moveoccurs then Lewis would buy or lease an entirelynew set of equipment, so management wouldlike to include a cancellation clause in the leasecontract. What effect would such a clause haveon the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you werethe lessor, would you insist on changing any ofthe other lease terms if a cancellation clause wereadded? Should the cancellation clause containprovisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
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